Your Credit – Common Misconceptions & How To Improve

The business of credit can be complicated. It’s taken me a long time to sort out how credit reporting works and, for the most part, I’ve been able to use the rules and guidelines to my advantage. Following are some common misconceptions, and how you might raise (or lower) your credit score.

MISCONCEPTIONS

Closing Credit Accounts Will Improve Your Credit

It seems logical. You pay off a card, and close it so you will no longer be tempted to use it. And, having less open credit cards could only make lenders look at you as more responsible, right?

Wrong. Lenders don’t care how much credit you have available, they care how much you’re using. Your debt-to-credit ratio is one of the common measures used by the credit reporting agencies, and closing accounts will increase this ratio – this is not a good thing.

For example, say you have 10 open cards with a total credit line of $50K, $10K of which you’ve utilized. Your DTC ratio in this case is 1:5. If you were to close 2 of those accounts, reducing your total credit line to $30, your DTC ratio would then be 1:3, meaning you’re using one-third (33%) of your available credit, instead of one-fifth (20%).

If you feel you must close some accounts, focus on those with lower credit limits, such as store cards. However, I would not recommend it in this current credit climate because lenders are closing unused accounts left and right. In fact, some experts have recommended that people start using their cards once or twice a month (and paying them off monthly, obviously) to ensure those lines of credit remain open.

All Credit Reporting Agencies Are The Same

Again, seems logical. However, the three credit reporting agencies (Experian, Equifax and Transunion) are private/public (read: non-government) companies and competitors. They use different models for calculating credit scores. If you would like to check your credit through all three reporting agencies, you may do so for free once a year through Annual Credit Report Dot Com.

Credit Scores Aren’t That Big Of A Deal

Sorry, but they are. Everyone should take their credit scores seriously, as they are not only used by lenders, but landlords, insurers and, increasingly, potential employers. Some people swear off credit cards, but the plain fact is that they’re useful for establishing credit and should be used, responsibly. Not establishing your credit is a big mistake.

Making Minimum Payments Is Better Than Nothing

Sure, better than nothing, but not by much. You might maintain somewhat decent credit, but you’ll spin your wheels. Paying even 10% above your minimum can do wonders in decreasing you debt owed, which will decrease your debt-to-credit ratio. Whenever possible, pay above the minimum due.

Paying A Bit Late Is Not That Big Of A Deal

You must pay at least 30 days late for a delinquency to show up on your credit report (the are noted as 30/60/90/120+ days late). However, paying late has other ramifications. You will be charged a fee by your lender and your interest rates will shoot up, meaning you will pay more in finance charges, increasing your DTC ratio.

HOW YOU CAN LOWER YOUR SCORE

“Shopping” For Credit Excessively

Missing Payments

Ignoring Medical Or Utility Bills

Overusing Your Available Credit & Maxing Out Your Credit Cards

Failing To Report Changes In Address To Lenders

HOW YOU CAN RAISE YOU SCORE

Establish Yourself As An On-Time Payer

Keep High Credit Limit Cards Open

Use Cards Often If You Can Pay Balances Every Month

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7 Responses to “Your Credit – Common Misconceptions & How To Improve”

  1. John (aspex) Says:

    Using this logic. My score should be horrible. Well, we’ll see how much I can fix that. What with not earning much.

  2. pennyplastic Says:

    John, have you checked your scores recently?

  3. Dione (TakeADeepBreath) Says:

    Great advice Penny. I live in Atlanta, which is the land of Clark Howard. If you haven’t heard of him, look him up. He’s is amazing, and he would be very proud of this blog.

  4. SarahMC Says:

    So informative! My credit is absolute crap; I haven’t checked it in a while because I’m actually afraid and don’t want to sink further into a personal-finance-related funk.

  5. FreudRage Says:

    It’s not free credit report dot com that gives you 1 report from each company for free per year, it’s annual credit report dot com (you have it linked there though). Just saying this because free credit report is a rip off, they make you put in your credit card information to get the “free” report, then they enroll you in this monthly program thingy without your knowledge. You wind up paying $40/month and they make it difficult to cancel. With annual credit report, they give you the reports, but not the actual scores, which you have to pay for. Annoying.

    Anyway, long-time lurker, first-time commenter, dig the site!

  6. pennyplastic Says:

    Hi there! Yes, you are correct, I linked to the correct site but accidentally wrote “Free Credit Report.” I will change that ASAP!

  7. Keep An Eye On Your Credit, Kids « Says:

    […] An Eye On Your Credit, Kids By pennyplastic As I’ve talked about before, your credit score is important for more than securing lines of credit.  Over at Consumerist, they […]

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