Trying to get a handle on the world of credit can be confusing and is not easy. There are many myths and misstatements about credit that are repeated as fact, making what you think you know about credit and credit scores probably wrong. If you want to be smart about credit, here are the things that you do not want to do.
Believing That You Only Have One Credit Score
You do not have just one credit score, you have many. The credit scores most lenders use are called FICO scores, but there are also different credit scores using alternative calculations created by other companies to judge your risk of default on various types of credit products. These credit scores change all the time based on the constantly shifting information in your credit reports. If the credit score you get is not called a FICO, it is probably not a FICO.
Believing That You Have To Accumulate Debt To Have A Good Credit Score
It is easier to achieve good scores if you have a mix of revolving accounts and installment loans, but you can have good credit scores without ever carrying debt or paying a dollar in interest. Simply use two or three credit cards and pay off the balances each month. Credit-scoring formulas are very sensitive to the amount of your available credit you are using at any given time and anyone who takes on too much debt is likely to start missing payments so it is best to only charge what you can pay in full at the end of the month.
Believing That Paying Old Debts Erases Them From Your Credit Report
A collection agency may be persuaded to delete a collection account from your credit reports in exchange for payment, but what the original creditor reported about you typically will not be erased. The skipped payments and charge-off of the account is the information that is most damaging to your credit scores. The credit bureaus continue to report negative information for up to seven years and bankruptcies can be reported for up to 10 years. Do not fall for a credit repair firm’s pitch that true, negative information can be erased from your credit files.
Believing That Bankruptcy Is Equal To Stealing
Most people who owe debts they cannot pay never intended to find themselves in their current position. These people often drain assets that would have been protected from creditors, such as retirement accounts or home equity, in their attempts to repay their debts. Declaring bankruptcy and throwing in the towel on debts you cannot pay may be the best option for your financial situation. Consult a bankruptcy attorney to review your options before you decide to file.