Your credit rating or Credit Score plays a major role in your finances today.Your score determines not just IF you get approved but also the terms you are offered. It also determines the cost of your car, renters, homeowners, and life insurance. More and more, employers check a job applicant’s credit before hiring them. Right or wrong, it also affects how we view ourselves.
And there are many mistakes to make when trying to improve your credit score.Having helped over 4200 families become homeowners and reviewed thousands of credit reports, I am here to tell you the Credit Scoring process rarely applies common sense to the equation. What you might think will raise your score will actually lower it and vice versa. (see list below). .
Mistake #1: Hiring a credit repair company to “REMOVE” negatives from your credit Report!!
While it is legal & possible to remove negatives from your credit report, many times it does not help. Why? Well the computer is programmed to forget about negatives that are over 13 months old. So removing a 4 year old collection will result in little/no score increase. In fact, when you dispute an old account, many times the creditor verifies the account AND with the new current date dropping your score 25 – 50 points!!
Mistake #2: Paying off old collection accounts will actually DROP your score!!
Once you pay off an old collection account, the creditor will report your account as paid. However, by paying it off you have changed the reporting date from several years ago to today. AMAZINGLY, the computer sees the updated paid collection as a new derogatory. Even though the account is paid your score will drop 25 – 50 points – for an account that is several years old!!!! In most cases, collections over 12 months old DO NOT need to be repaid anyway to qualify for FHA financing.
Mistake #3: Not believing that a $300 Visa is 10 times more effective than a $15,000 car, student, or signature installment loan.
REVOLVING credit such as Visa, MasterCard, Department Store, and Gas cards ARE 10 TIMES MORE EFFECTIVE than on-time INSTALLMENT credit such as car, mortgage, signature, and student loans. And a $300 limit credit card is just as powerful as a $3,000 limit credit card. 75% of your credit score is determined by what kind of open/active credit you pay on right now – not old, closed credit.
Mistake #4: Believing Filing bankruptcy will wreck my credit scores – WRONG!!!!
Filing Chapter 7 bankruptcy will actually improve your credit scores. Once an account is reported as “Included in Ch 7 bankruptcy”, which most creditors fail to do, the credit scoring computer is unbelievably programmed to “pretend” this account does not exist – it is as if the account has been removed from your credit report. Once you update bankruptcy correctly you will have fewer negative accounts included in the credit score calculation and consequently a higher credit score – as much as 100 points higher.
Mistake #5: Using a credit monitoring service like FreeCreditReport.com to verify your credit scores.
These services are great for receiving alerts when changes to your credit report occur like reporting of new derogatories or when someone accesses your credit report. However, these services provide SIMULATED scores not REAL Fico scores. These scores are usually off by 20 – 50 points high or low – rarely do they match your true FICO score. MyFico.com is the only place on earth to get your TRUE Fico scores without applying for credit.
Mistake #6: Opening Pay Day loans, signature, and”interest free 6,12,24 months” store accounts.
These types of credit are considered “Finance” accounts and are statistically proven to lead to late payments & collections. So the credit computer will dock you points if more than 1 is open at any time even when paid on time.
Mistake #7: Believing small late payments like a $20 creditcard or getting a new $100 collection account will not hurt my score.
While the credit computer is very nice to forget credit sins over 13 months old, it is very rude when it comes to “New” bad credit. No matter how small the new Bad is it will cost you 35 – 70 points and take 6 months of on-time payments to recover – even just 1!!!
David Zabawa is founder and President of HomeBuyers Assistance Foundation, Inc. Since founding Home Buyers in 1999, He has helped thousands of renter obtain their dream of home ownership. For more information on credit scores and obtaining Home Ownership visit www.homebuyerhelp.us.