10 Credit Report Myths

With today's tightened lending requirements, credit is harder to come by. So 750 is the new 720 - when it comes to an above-average credit score, that is. Whether you're thinking of refinancing your mortgage, purchasing a new home, or taking out a car loan, it's more important than ever to understand the factors that affect your credit report. After all, a higher credit score could very well translate into a better interest rate that saves you thousands of dollars. When it comes to your credit report, believing the myths can definitely hurt you.


1 - MYTH: I can boost my credit score by closing credit cards I don't use.

FACT: Think twice before closing an account - especially if it's a credit card you've had for several years. That's because both the length of time that an account is open and the balance in relation to the card's maximum limit factor into a credit rating, according to Rodney Anderson, a mortgage and credit expert and the managing partner of Rodney Anderson Lending Services located in Plano, Texas. A better bet may be to store the credit card in a drawer. Just be sure to keep the account active by using the card to make a purchase at least once a quarter, he advises.

2 - MYTH: Checking my credit report will lower my score.

Fact: A "hard credit pull" - say when you're applying for a new credit card or a mortgage - will stay on your credit report for at least six months, and will lower your score, says Avinash Karnani, co-founder of justthrive.com, a free online personal finance management tool. But when you check your own credit report, it does not impact your credit score. In fact, checking your credit report and score is a "great tool, especially when you're making big-ticket purchases," says Charles Harris, an executive at FreeCreditReport.com. "The higher your score, the more likely you may be able to negotiate lower interest rates, which gives you more control over your personal finances."

3 - MYTH: My age, race, gender, marital status, income, or where I live can impact my credit score.

Fact: Not true, says Lynnette Khalfani-Cox, author of Zero Debt: The Ultimate Guide to Financial Freedom (Advantage World Press, 2008). Under U.S. law, it is illegal for credit scoring to take into account race, age, color, nationality, religion, sex, or marital status.

4 - MYTH: If I negotiate with my credit card or mortgage company, my credit score will go down.

Fact: That's not necessarily true, says Spencer Sherman, author of The Cure for Money Madness (Broadway, 2009) and founder of Abacus Wealth Partners, a wealth advisory company. "If you're up-to-date with payments, it will not likely affect your score," he says. To protect your score, try extending the term of the loan or negotiate a reduction in interest rate as opposed to a reduction in principal, he advises.

5 - MYTH: I pay cash for everything and don't buy on credit or use credit cards, so my credit score should be excellent.

Fact: Having no credit history or never using credit can actually have a negative impact on your credit score, says Khalfani-Cox. In fact, people with no credit cards tend to be viewed as higher risk than those who have managed their debt responsibly. Credit rating agencies like to see that you have a history of paying credit obligations on time.

6 - MYTH: My $6 library card fine will have no impact on my credit score.

Fact: Library fines, even if they're small, can lower your credit score by as much as 50 to 100 points, says Rich Rosso, a financial consultant for Charles Schwab. The same applies for unpaid parking tickets and utility bills. If you pay up before the debt reaches a collection agency, you should be OK. Visit your library's web site to find out its collection agency policy, Rosso advises. "Every municipality appears to have various time frames for collection based on size of the debt and the length of time it's been in arrears." For example, Cedar Rapids Public Library in Iowa will initiate a courtesy reminder three times after items are due. If fines are still not paid and books are not returned, then the borrower's account may be turned over to a collection agency.

7 - MYTH: If I pay off a collection account, my credit score will immediately improve.

Fact: Not so, says Rosso. "Paying off a collection account will not remove it from the credit report. It will remain for seven years."

8 - MYTH: As far as credit rating is concerned, all credit cards are the same.

Fact: Stay away from store-brand credit cards. Approximately 10 percent of a person's credit score is based on the institutions from which money is borrowed, says Anderson. And finance companies, which are often used by retailers that offer their own credit cards, are considered higher risk than banks. "A prevalence of credit lines from finance companies could negatively affect your credit rating," he says.

9 - MYTH: As long as I don't max out my credit card, my credit score will be fine.

Fact: That's wrong, Sherman says. "Most people stay just at the edge of their credit limits, but you want to stay well below your maximum available credit." That's because 30 percent of your credit score is dependent upon the percentage you are using of your total available credit. Aim to keep your balance within 25 percent to 35 percent of your credit limit.

10 - MYTH: I don't make enough money to have a good credit score.

Fact: Your income has no effect on your credit score, says Karnani. This myth may derive from a truth; namely, people with more money tend to have better credit scores. "People who make more money are less likely to be borrowing above their limits and paying for things on credit rather than using existing funds."

Still, anyone can improve his or her credit score by taking simple steps, Karnani says: pay down your debt, monitor your credit report to track how often you are applying for cards and loans, and make sure to keep your oldest credit card open so it remains in your credit history.