11 things you never knew about your credit report
Most people have heard about the alligators in New York's sewers and
the little kid with cancer who wants a zillion postcards.
those aren't the only myths floating around out there. For example, a lot of the
things that people "know" about credit reports and FICO scores have
about as much validity as those monstrous Manhattan alligators.
So here's a look at 11 common credit report myths
and what the truth really is.
Paying my debts will make my credit report instantly pristine.
credit report is a history of your payments, not just a snapshot of where you
are at the moment, says Maxine Sweet, vice president of public affairs for Experian,
one of the three major credit-reporting agencies. As the author of popular Web
column Ask Max, she continuously reminds people that you can't change the past.
2. Credit counseling always destroys my credit
Attending a credit counselor's debt management program is
not considered negative in the scoring models.
don't want consumers to consider credit counseling as detrimental to their scores
as filing bankruptcy," says John Ulzheimer, partner channel manager at Fair,
Isaac and Co. (FICO).
when the credit counselor negotiates a lesser contractual obligation, the lender
decides how he wants to report that. So if your $500 monthly payment is refigured
for $300, the creditor may either legally report that as $200 in arrears every
month or reward you for not filing bankruptcy by reporting the account as up-to-date.
credit counseling does not greatly influence your credit score, it is apparent
on the report that you've been through counseling -- and that is something individual
lenders may not like. Their responses vary greatly. Some will consider you radioactive
and not deal with you for years. Others will charge you higher rates. A few may
even cut you a break.
In the real world, says John Waskin,
executive director of BillFree American Credit Counselors in Huntersville, N.C.,
auto lenders tolerate credit counseling the least.
most car dealers see that you're on debt management or credit counseling, they
have an opportunity to take advantage and charge you an exorbitant rate,"
Others, such as GMAC, will actually improve
your score to give you a loan after you've worked with credit counseling for at
least eight months because this route paints you as a responsible person. But
as a blanket rule, he asks potential clients to delay joining his program until
after the transportation loans are settled.
credit card side, "if you call Bank of America or First USA three times and
ask three different people, you'll get three different answers," Waskin adds.
"Approximately 45 percent of underwriters say credit counseling is a good
thing, 25 percent think this is akin to bankruptcy."
remaining 30 percent vary their answers, depending on their mood that day.
3. Canceling credit cards boosts my score.
spells available, potential debt, so better close them, runs the legend. But experts
agree that most creditors want to see at least two or three pieces of active credit
to prove you can manage debt responsibly.
chimes in, those unused cards lying in your jewelry box aren't wreaking havoc
with your score.
"The myth is that they look ominous
to potential lenders," he explains. "Reality is that paying your bills
on time and not being overextended is more important than having $5,000 worth
of available credit on a card you're not using. We continue to evaluate this 'open
to buy' statistic, and we simply don't find it falling into one of those highly
On the other hand, extremes
never look good. Opening one charge account occasionally to take advantage of
a 10 percent offer is negligible. Going wild and signing up for 15 during the
holiday season probably would invite a decreased score, he notes.
4. Too many inquiries hurt my score.
Once upon a time,
this statement was true. But get with the times -- in this millennium, the credit
agencies recognize a shopping mindset when they see one. If a batch of mortgage
or car loan inquiries arrive within a 30-day period, they don't count at all,
"Outside that 30-day
period, if we locate a mortgage or car inquiry that occurred 180 days ago, and
then see more mortgage or auto-related hits in the accompanying 14-day window,
we err on the consumer's side and still assume she's shopping for one item,"
"We really feel like we are capturing
the true consumer experience and not holding it against them for being an aggressive
or smart rate shopper," he adds.
no such thing as some fixed number of points associated with these inquiries,
"Inevitably when a consumer or a lender
evaluates a credit file, they think this item must be worth 20 points, this is
worth 100 points," he says. "In reality we try to evaluate credit reports
so that the information is given a reasonable or statistically valid number of
In English, that means FICO is designed to predict
the likelihood of an account going bad under given circumstances. Some things
have predictive value and some don't. Inquiries fall in the middle.
not incredibly predictive, so they're in the model but they don't drive the boat,"
5. Checking my own credit report harms my
The reporting agencies distinguish
between soft and hard pulls. When Target calls to check before issuing its line
of credit, the agencies chalk that up as a hard pull and it counts against your
score. Personal requests and credit counselors -- if they do it correctly, so
insist on this as part of your agreement terms -- fall under soft pulls, which
do not reflect on the evaluation.
Using a company that promises
credit reports as a perk can turn this myth into a self-fulfilling prophecy, however,
says Deborah McNaughton, owner of Professional Credit Counselors and author of
Out of Debt Kit. Because they are merchants in disguise, their freebie
costs you. Citizens must go directly to the three bureaus if they want a soft
pull. Ditto FICO.
"Pulling your credit scores is quite empowering,"
says Ulzheimer. "You have a choice: you can either be very aggressive with
your credit management and pull your score with some regularity or take a more
passive approach once a year to see where all those credit cards actually sit."
6. FICO scores are locked in for six months.
and Company's models are dynamic, meaning they change as soon as data on the credit
"When we calculate a score,
for all intents and purposes it then goes away and is recalculated the next time
someone pulls your file," says Ulzheimer.
7. I don't need to check my credit report
if I pay my bills on time.
the Consumer Federation of America and the National Credit Reporting Association
analyzed credit scores in the summer of 2002, they discovered that 78 percent
of the files were missing a revolving account in good standing, while 33 percent
of files lacked a mortgage account that had never been late. Twenty-nine percent
contained conflicting information on how many times the consumer had been 60 days
late on payments.
"There can be a lot of other
activity going on that you don't have any clue about," McNaughton notes.
In her experience, 80 percent of all credit reports
have erroneous information ranging from a wrong birth date to accounts you never
8. All credit reports are the same.
Way wrong. These days, most creditors across
the country do report their information to all three major agencies: TransUnion,
Equifax and Experian.
But, "That was not true
in the past," Sweet admits.
And, because they are separate
companies, the speed in which they update records isn't necessarily equal.
the agencies use inquiry activity to update your address, phone numbers, employment
status and the like. Because creditors typically pull only one company's report,
it's possible that, say, TransUnion doesn't show your current address.
to McNaughton, she's never seen a client yet for whom all three reports spit out
the same records and scoring.
9. A divorce decree automatically severs joint accounts.
judge may have rubber-stamped your plans to divide credit card, car and house
payments, but that carries absolutely no legal weight with the creditors themselves,
"We see so many people who, a year
or two after the divorce, are just outraged and hurt because their credit report
reflects their ex-spouse's missed payments," she says.
at that point, they are helpless to erase the damage.
parties must contact the creditors and either close current accounts or have the
booted name sign a letter of consent for this action. And assuming certain debts
isn't a unilateral decision on your part, notes Sweet. Creditors typically do
a credit check on your name, and if they don't deem you financially stable enough
to assume that $30,000 car loan, for instance, they won't agree to remove the
10. Bad news comes off in seven years.
Some of it does. Chapter 13 (reorganization
of debt) disappears seven years from the filing date. But if you filed Chapter
7 bankruptcy (exoneration of all debt), the window is 10 years from the filing
On the good news side, accounts in bankruptcy
can be deleted seven years after the date of your first missed payment, so those
individual pieces may disappear before the word "bankruptcy" on your
report. And if you pay off or close an account that had no delinquencies or problems,
it, too, remains on the record for 10 years rather than the previous seven, say
Experian experts. Again, this means positive information hangs around longer,
as a consumer benefit.
11. I can always pay someone to fix or repair
"Virtually any time someone
says that, they're lying," Waskin says.
Yes, you can
clear up erroneous information posted to your account, such as a repossessed car
that you didn't purchase in the first place, but if you paid your Sears bill three
months late in 1997, that's a hard fact.
to fix your credit deliver on their promises by generating a flood of dispute
letters to the credit reporting agencies, which means the listing must come off
at that time. But if you can't prove the information in question is incorrect,
the agency slaps it right back into the file after 30 days.
had a client who wanted to negotiate a debt to a clothing store. We called the
store, which had sold the paper to someone else and had no record of this transaction.
The middleman sold it to yet another company, which didn't know what the heck
I was talking about," Waskin says.
told the credit reporting company if it couldn't verify the amount owned, it must
take it off my client's record. But the consumer can do that without spending
money for a company to write that letter."
Updated: Jan. 20, 2005