Tuesday Tips: Myths of Credit Scoring

7 Jun

Since I’ve been  licensed mortgage loan officer for five years now, I thought I’d share some of my knowledge with you all today.

I’ve had many clients come to me with advice they’ve gotten from friends and family only to end up telling them what they’ve heard is completely false. In this Tuesday Tip Blog, I’ll help clear up the mistruths around credit scoring and credit repair.

Myth #1– Paying off an old collection will increase my score. Wrong. If you make a payment on an old collection or an oral promise to pay it, you risk an immediate big drop in your credit scores and also risk renewing the statute of limitations.

Myth #2– Closing credit card accounts will help my score. Wrong. You will lose points in 2 ways if you close a credit card account. First, it will affect your Amounts Owed Factor which is worth 30% of your score. It will also affect your Length of Credit History Factor which is 15% of your score.

Myth #3– Paying off a negative account will remove that item from my report. Nope! There are specific statutes and laws that allow these items to remain on your report. However, you can seek early removal.

Myth #4– Small collections don’t matter as much as large ones. In actuality, the score penalty does not differentiate between a $100 collection and a $1,000 collection. If you come up against a big medical bill or any bill for that matter, please set up a payment plan!

Myth #5– Adding a consumer statement to my report makes a difference. A statement is just text. It doesn’t affect your scores, and the lender will probably not even read it. All that matters to lenders is your score, open collections, late payments, and public records such as judgments and liens.

Myth #6– It’s ok if I go over my credit card limit because the bank authorized it. Even if you go over your limit by $1, you’ll be charged fees and you’ll see an 80-100 point drop in your scores.

Myth #7– FreeCreditReport.com is free. If it was free, how would they pay for all of those catchy commercials? They will charge you a $14.95 fee every month because you have to sign up for “Triple Advantage”. The only free credit report can be obtained at  annualcreditreport.com.

Myth #8– Paying off tax liens, judgments, and other public records will improve my score. While I believe all debt deserves to be paid, it is the truth that paying off public records has little to no affect on your credit score. The fact they happened at all is what affects your score the most. Judgments and tax liens can cost you 100-150 points, while a bankruptcy results in a maximum hit of 300 points.

Truth #1– Once your balance goes over 50% (some say 30%) of  your available balance, you start losing points. A maxed out credit card can cost you 80 points.

Truth #2– The amount of your credit limit does not affect your score. A card with a $500 limit is scored the same as a $5000 limit.

Truth #3– A settled debt (paying less than you owe) will result in a hit up to 100 points. If the debt is not paid in full, the creditor can report it as “Paid for Less Than Total Amount Due”, “Paid Settlement”, or “Settlement Accepted on This Account”. All of these options could hurt your scores by a maximum of 100 points.

Truth #4– Use your credit cards. While I don’t advocate swiping that credit card for all purchases, it is a good idea to use your credit cards in order to establish credit history and improve your credit scores.

 

If you are interested in learning more about any of these topics, please feel free to e-mail me at runeatdatesleep @ gmail.com.

 

*Excerpts from this newsletter were taken from “The Big Score” by Linda Ferrari.

If you’d like to see more posts like this, please let me know! I’ve got so much information I could share with you about mortgages, credit scoring, and how to repair your credit on your own.

 

Disclosure: I do not claim to be a credit repair company.

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7 Responses to “Tuesday Tips: Myths of Credit Scoring”

  1. runningtothekitchen June 7, 2011 at 3:55 pm #

    Good post! It amazes me how many people are clueless about their credit score and these “truths”.

  2. Jackie Smith June 7, 2011 at 4:03 pm #

    I’d love to hear more about this topic! So much of finance seems to be hidden in the fine print; I would appreciate your knowledge.

  3. Tiffany June 7, 2011 at 4:11 pm #

    Thank you so much for this. It is so hard to figure out what is what with so many different things about your credit report flying around. This was very helpful.

  4. rc1001 June 7, 2011 at 4:31 pm #

    Loved this post and would definitely be interested in more! I work for a bankruptcy attorney so I deal with this kind of stuff all the time

  5. Sonja June 7, 2011 at 4:37 pm #

    Wow, that was awesome! Thanks so much for posting this information. I’d love to hear more!
    I recently lost my car in a car wreck. In the state of SC if the amount of fixing the car is 80% or more of what the payoff of the car is, then they total it. Well, I had GAP insurance too. It didn’t take care of what was left owing on the car because there were payments we had deferred on the car loan cause we had a house fire. Ford Motor Credit says they sent us a letter saying we needed to keep paying for the car until the debt was settled. Well, we never received any letter like this. In the end I owe 2500.00 to them and my credit score is in the 500’s now cause they got me for 120 days late paying the car payment. Now I can’t buy a car 😦

    Back in 2003 we filed Bankruptcy due to my husband having cancer and us almost losing the home. We ended up paying our way out the Bankruptcy, but it’s still on our credit report. Do you have any idea how long that will stay on there? It’s funny we bought the new car in 08 while it was on the report, but now after the credit score has dropped down so low we can’t get one. We really don’t know what to do to be able to get the score up again. Any ideas?

    Thanks so much… I’ll keep my eyes peeled for more information!

    Sonja

  6. simplyshaka June 7, 2011 at 6:15 pm #

    Great post! I used to work with small business loans and had to review CBRs and SBFEs like no other. I wish more people would know about the settlements, its scary how many I saw out there.

  7. Alison @ The Peacock Diaries June 8, 2011 at 6:33 pm #

    This is a great post! I am pretty good on the things that lower your score, but I wasn’t super clear about the things that can raise it.

    Thanks for sharing 🙂

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