Four Common Misconceptions Regarding Credit
Having worked in banking and finance for over 15 years, I am always surprised to realize how confused most people are regarding how the credit system works. Here are the top four misconceptions regarding credit I hear most often.
Myth One: Information in my credit file cant be changed.
Truth: Anything that you disputed with the credit bureaus must be verified as being accurate in order to remain in your credit file. According to the Fair Credit Reporting Act, if the lender cant verify that a disputed trade line is correct, the credit bureaus must remove the item from your file.
Myth Two Past due collections should be paid immediately to raise my credit score.
Truth: When you pay off an account, it is true that the lender will report that it is paid. Unfortunately, the late payment will still show up. If the account is very old and has not had activity for quite some time, paying it off may actually hurt your credit score.
When you pay off an account, you renew the date that the account was last active. Because something recent is going to have more impact on your score than something that happened a long time ago, a paid collection with a recent date of last activity can sometimes have a more negative impact on your score than an old unpaid collection.
This doesn’t mean that you shouldn’t pay off your collections. What you will want to do is negotiate with the creditor as to how it will be reported to the bureau BEFORE you pay the account. Be careful here: make sure you get everything in writing!
Myth Three: Bankruptcy is the best solution for starting over.
Truth: There are times that bankruptcy is the only option, but it is a decision that should be weighted heavily. Though new laws now prevent many people from filing, even those that still can should consider the decision very carefully.
A bankruptcy stays on your credit report for ten years. This means that you will pay a higher interest rate for everything ” homes, cars and credit cards. You will also have to wait between two and three years after filing before you can qualify for a mortgage.
Very often, lenders will be willing to re-negotiate when they hear that you are considering bankruptcy. The bottom line: it should be considered a last resort option.
Myth Four: Something accurate can never be removed from my credit file.
Truth: Credit bureaus are required to confirm the accuracy of accounts when they are disputed. The Fair Credit Reporting Act gives lenders only 30 days to verify the account before the credit bureau is required to remove it from your file.
If the lender misses the deadline, the credit bureau must remove the account from your bureau, regardless of if it is accurate or not. It is easiest to take advantage of this on older trade lines as well as those that are currently paid off but were once past due. In both situations, your information can be difficult for the lender to locate, and they don’t have much motivation to do so.
Knowing what to do is half the battle in achieving your ideal credit score.