When it comes to credit report and credit score, there are lots of rumors or misconception you have heard from your relatives, friends, and neighbors. There are a plethora of myths about what you should and shouldn’t do to manage your credit. But all what you have heard are not right and may cost you lowering your credit score or additional issue in credit report.
Here are 5 common credit misconceptions and the facts which will help you make responsible decisions when managing your credit.
1 Your score will drop if you check your own credit – False
This is most probably the most common myth however monitoring your credit score helps you track progress when building credit, but it is important to check it the right way.
Checking your credit report and credit score through either a credit monitoring site or cibil.com is considered as a “soft inquiry” on your credit reports which does not impact your credit scores at all.
Only “hard inquiries” initiated by a lender or bank, which are applications for an extension of credit, can impact your credit scores.
2 Closing old accounts is a good idea – False
Many people preach closing old and inactive accounts as gospel. But you should think twice before closing your oldest accounts. Closing old credit accounts with a good credit history can lower your credit score by decreasing the average age of your open accounts and shortening your length of credit history, which accounts for 15% of your overall credit score.
Keep your oldest accounts open and active, even if they have small credit limits.
3 Paid collections are automatically deleted from your credit report – False
Derogatory trade lines such as collections, charge-offs, and repossessions remain on your credit reports for longer time whether they are paid or not. Paying off the account doesn’t remove it from your credit report automatically.
It is still a good idea to pay your debts but, just be aware of one very important thing. Accounts active within the last 6 months have the most impact on your credit scores.
So although paying an old collection account may seem like a logical step toward improving your credit score, it may actually end up lowering your credit score because it re-activates the date of last activity or date last reported on the account and may end up lowering your credit scores.
Before paying an old inactive collection you may want to validate the debt.
4 Being a co-signer doesn’t make you liable for the account – False
If you co-signed for someone’s loan, there’s something you should know. When you open a joint account or co-sign on a loan, you are taking legal and equal liability on the account.
Any activity on these shared accounts, good, bad, or ugly will show up on both consumers’ credit reports. If you co-sign for a friend’s auto loan and they don’t make the payments, your credit score will be hurt by their poor payment history and vice versa.
In fact, if the borrower defaults on the loan, as the co-borrower, you will be 100% liable for the debt, and responsible for paying all of it back.
In nutshell, don’t co-sign for anyone unless you are willing to take over the payments and responsibility for the debt if the person you co-signed for cannot make the payments.
5 Paying off a debt will add 50 points to your credit score – False
Your credit score is a compilation of several different factors. It is very difficult 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.
Paying off a debt may increase your credit score in some cases but it may lower your scores as well. It is important to take a look at your credit report as a whole before making a decision to settle any accounts.
Most importantly, pay your bills on time, reduce the amount of revolving debt you have and work on removing erroneous, misleading, inaccurate, or incomplete derogatory accounts from your credit reports either by yourself or by hiring a company like apoorvaa foundation to do the work on your behalf.