Considering how important your credit report and your resulting credit score are for you, it never ceases to amaze me how many people trust in and rely on misconceptions, myths, and downright bunk about how credit reporting really functions.
A lot of people do not know that they have three entirely separate and different credit reports, one from each of the three credit reporting bureaus. Because these bureaus do not share data it means that not one of them has a real and complete image of your credit. Even more so, chances are extremely high that your credit report with at least one (if not all) of the credit bureaus contains mistakes, and the only way the errors will get erased is if you dispute them.
However let’s spend some time here discussing about some very popular myths about credit, credit scores, and credit reporting, and see what the real deal is on this misconceptions.
Myth #1: Paying off a negative account on your credit report will get it erased from your report.
That account will stay on your credit report for years, because it is part and parcel of your credit history. Keep in mind, your credit history is exactly that – a history of your dealings with credit, and simply because an account is closed or paid off does not dismiss the fact that it continues to be part of your credit history.
Myth #2: Paying off an account will have your credit score to improve significantly.
There are a large number of factors that come into account when the credit bureaus calculate your credit score. Most important amongst those factors are: have you been paying your financial obligations on time with at least the minimum payment due. Paying off an account completely can in reality do more bad than good. Having credit in good standing, but maintaining your balance less than about 32% of your credit limit is a wonderful place to be, and you receive no additional points by paying off that account.
Myth #3: Verifying your credit reports will decrease your credit score.
The financially savvy consumer will verify his credit report at least annually, sometimes more often. Every time someone asks for a copy of your credit report, that fact is noted, but it is also noted as to who asked for your credit report. If it was you, then it doesn’t impact your credit score, on the other hand, it affects if it was requested by 12 different loan companies, which is almost sure to raise a red flag and decrease your score.
Myth #4: Cosigning for a loan does not imply that you are responsible for the account.
The reason you were asked to co-sign on a loan or an account for someone is because they themselves don’t have enough credit history or have bad credit history. The fact that you are co-signing on it is you telling the financial institution “hey, if they default on this, I’ll take care of it”, so you do have responsibility for the loan. But this is not all – if the person who took out the loan begins to default on it, then it is also your credit score that is going to be damaged, because again, you co-signed on it, giving you some responsibility for making sure they repay it on time.
Know how the credit game is played. You cannot win any game if you don’t know the rules, and since credit affects a lot of different parts of your life, it is definitely worth your time to understand the factors and the myths about how your credit score is derived.