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Top 5 Credit Misconceptions

September 25, 2008

95 comments | Comment on this Article

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We have all heard the rumors...from neighbors, relatives or friends. There are a wide variety of myths floating around about what you should and shouldn't do to manage your credit. Credit Karma has exposed these urban legends to provide you and your informers with the truth about credit:

Your score will drop if you check your credit - Fortunately, this one is definitely not true. Checking your own report and score is counted as a "soft inquiry" and doesn't harm your credit at all. Only "hard inquiries" from a lender or creditor, made when you apply for credit, can bring your credit score down a few points. Worried about damaging your credit while shopping around for a loan? Multiple inquiries for the same purpose within a short amount of time (a few weeks) are grouped together into a less damaging period of inquiry.
Closing old accounts is a good idea – To close or not to close, that is the question. Many people advocate closing old and inactive accounts as a means of managing their credit. But they should think twice before closing the oldest account on their credit reports. Canceling old credit accounts can lower a credit score by making the credit history appear shorter. If you want to reduce your levels of available credit, ask for your credit limits to be lowered or close newer accounts instead.
Once you pay off a negative record, it is removed from your credit report - Negative records such as collection accounts, bankruptcies and late payments will remain on your credit reports for 7-10 years. Paying off the account before the end of the set term doesn't remove it from your credit report, but will cause the account to be marked as "paid." It is still a good idea to pay your debts, just be aware the major change in your report will come when the negative records expire.
Being a co-signer doesn't make you responsible for the account - When you open a joint account or co-sign on a loan, you are taking on legal responsibility for the account. Any activity on these shared accounts, good or bad, will show up on both people's credit reports. If you co-sign for a friend's auto loan and they don't make the payments, your credit profile will be hurt by their actions and visa versa. The only way to stop this double reporting is to refinance the loan or to have the creditor officially remove you from the account.
Paying off a debt will add 50 points to your credit score - Your credit score is calculated using a complex algorithm that takes into account hundreds of factors and values. It is very hard to predict how many points you can gain by changing one factor. For a person with a high credit score, just one late payment can cause a significant drop. If a person has a low credit score, it may not cause a large drop at all. Just keep paying your bills on time, reducing your debts and removing negative inaccuracies from your credit report. Good financial behavior and time are the two most important factors for your credit score.

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Comments

(95 Total Comments)

Good article 'cause the information on methodology is confusing at best. However, the overriding fact is... these credit scores are bogus and do not truly represent an individual person's credit-worthiness.... only their credit availability. "

And selling the information back to the consumer should absolutely be illegal. All the agencies are required to give you a free annual report, but they all attempt to sell you a "program" when you inquire, thereby scamming more money from the unfortunate consumer. Capitalism at its best? Create a need and fill it. "

BrerRobert at 10:47 pm Feb 27

They already do. Annualcreditreport.com does not require you to sign up for a 'trial' of anything. You should not need to check your report more than once a year unless you are having major issues, in which case they are still free. If you are ever denied credit, you are entitled a free copy of the report in which was used to deny you. It is free.. You just need to know the rules and how to get them. "

sandykid20 at 11:20 am Mar 5

we have a 100% on time score - we have made a total of 610 payments, and all 610 payments have been on time. Yet, our credit score hovers between 640 and 650. We have never ever been even one day late with a payment EVER, yet we have the credit score of a wayward youth. "

The Credit Bureaus are fond of saying that the BEST indicator of whether a person will make payments in the future is their past payment history. Yet, with 610 consecutive payments made on time, we still are viewed as a bad credit risk? "

Whatever. . . "

ronbeth2 at 8:40 pm Feb 22

There are many factors that go into computing one's credit score. It is not only based on on time payments. For more information: http://www.creditkarma.com/question/difference_in_credit_scores

CK Moderator

Interesting article. I have a "fair" score and it looks like the main thing that brings the score down is that I have 4 open cards and 3 closed. I always pay on time (100%) and have worked diligently to bring my higher interest accounts down -- from looking at articles on this site, it looks like that might be a bad idea! In particular, I have a Capital One account with 23% interest I only owe $300 on, and want to pay it off before it comes up for the annual renewal fee of $65 in a couple of months. It's my oldest card, so maybe I should keep it. I want to get my score as high as possible in the next 6 months so I can replace my car with a "new" used one. I've paid off 6 car loans but it doesn't look like that counts for anything as far as getting a good rate on a new one! "

chacowalla at 12:45 pm Feb 17

Careful about closing that Capital One card... it will affect your credit score if you've had it open for a while. "

sandykid20 at 11:21 am Mar 5

Pay the balance all the way down so you are not paying interest. Making the balance $0 does not close the card. Check your card agreement for activity rules. If you need to have a monthly transaction on it, set up automatic payment of one of the bills you already have (say... Electricity) and then pay the credit card off in full every month. This way, you have activity, but you don't have to pay interest (or very little depending on your grace period). "

nwhill at 5:47 am Mar 11

It seems that the credit reporting agencies really don't do justice to the consumer because it encourages us to incur credit card debt with the largest banks (they appear to spend a great deal of marketing dollars on these sites). I have several debit cards thru several bank accounts (on the Visa and Mastercard network). However, that doesn't get reflected in a credit report even though I'm managing my bank accounts and paying these networks a premium for using their service. "

JohnHoer at 12:34 pm Feb 12

if i've been reading right on this site, debit cards aren't reported because there's no repayment involved "

beach87 at 2:28 am Feb 21

Debit cards do not count on your credit report. There are no repayment terms involved. The same reason why checks are not reported, unless you bounce them like a rubber ball. "

sandykid20 at 11:23 am Mar 5

This is correct.

CK Moderator

Yes, you're right. But, the point that I'm trying to make is that obtaining a network card is not a priority for me and network bank cards seem to be a downfall for many consumers for the following reasons: "

They facilitate impulse purchases. "

Many consumers who carry balances are now stuck with substantial balances, decreased limits, higher interest rates, penalty fees, annual fees with fewer recourses for refinancing their debt. "

The price you pay for that new item will undoubtedly cost much more than you suspect if you carry a balance. "

Merchants and vendors must increase prices to cover the cost for their customer to be able to use their cards. And that includes debit cards, too. "

Even if you are a responsible user of credit cards, you are paying for those users who cannot pay their debt (banks are in this business for a profit). "

I do think that credit cards are useful and necesary in many instances, but perhaps they are not beneficial for everyone. "

Cash, debit cards and personal loans in that order) are more suitable for my credit needs and pattern of credit use. I can build a positive credit history without using a network bank card and with less risk and costs from misuse. It took me a while to learn that lesson. "

JohnHoer at 9:38 pm Mar 7

I know a Chapter 7 Bankruptcy can stay on a credit report from 7 - 10 years. But, if you have a two year history of on time payments and moderate credit utilization since the discharge, will that mitigate the effects of the bankruptcy? "

JohnHoer at 12:24 pm Feb 12

the further you distance yourself from the bankruptcy it's effects decrease, if i was to give you any insight id suggest paying off your cards or at the very least drop the balance under 25 pct of available credit. but remember to demonstrate credit and increase score they must show active. so using them once a month for small purchase a tank of gas or a shirt purchase etc. will show them active and in good standing,. good luck "

gatorman at 7:42 pm Feb 15

I have my 2nd mortgage paid down to $1575. I could pay it off now or pay off the lesser balances on my only two credit cards. But, when sick several years ago with a decrease in income, I hit a few bumps in the road in regard to my credit. Would it be better to pay off these accounts or continue making payments to improve my credit history? "

JohnHoer at 12:22 pm Feb 12

I'm having problems with hard inquiries. I was thinking of refinancing my home. I did permit one company to run a credit inquiry. However, they also ran three additional inquiries without my permsission. "

I also appplied for a personal loan. But, now I've found three additional hard inquiries from companies with whom I'm unfamiliar. Is there something in fine print that gives affiliates of companies permission to run reports? Because I'm now very skeptical of permitting anyone the opportunity the run a credit inquiry. And is this a question that one should ask a lender prior to having their credit pulled? "

JohnHoer at 12:11 pm Feb 12

You should check into that. Usually, mortgage and auto inquiries made within a time frame close to eachother only count as 1 hard inquiry. I would contact the other 2 firms to see what the inquiry was pertaining to. "

sandykid20 at 11:24 am Mar 5

They count as one when calculating a credit score but can still be shown multiple times on the credit report.

CK Moderator

I had a score of 598. I've been trying to bring it up slowly but surely. I have a loan out with a finance company. in 2009, I was out of work for 3 and a half months. Fortunately, I had insurance with the loan company that covered my monthly payments while I was on Medical Leave of Absence. The problem is, the insurance company didn't pay for one of the months, so the finance company sent a 30 late report, and it made my score drop from 598 to something like 540!!!! Well, I talked to the district manager and he agreed that was wrong, and he agreed to take the negative report off. "

I sent a dispute and the dispute came back as "report confirmed. no changes made" What can I do to get the score back to the way it was? "

TinkerMazell at 5:00 am Feb 9

You should get a letter from who you spoke with. They did not properly note your account so when they verified the past due, it was still showing 30 days. "

sandykid20 at 11:25 am Mar 5

I have a 5 year, interest only loan on a piece of investment property through a private lender. The equity in the property is double the loan value. I have been making payments on time for 1 1/2 years. This loan doesn't appear on my credit report. Would the lender reporting this loan to the credit bureaus help or hurt my credit rating? "

RobtBaja at 8:50 am Feb 8

I am very puzzled. I've been doing all the "right things" - paying down my credit card debt, always on time. I know I've had a hard inquiry because I was considering buying a house - there may have been a couple because my agent was "rate shopping"... but are inquiries enough to make my score drop despite all the good things I've been doing? How discouraging! "

SheilaC at 2:23 am Feb 8