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 the top for misconceptions I hear most often.
- Myth One: There is nothing I can do about what is in my credit file.
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.
An item that is five or six years old doesn’t have as much impact on your score as something that happened last month. By paying off an account, you will renew the date of last activity. A paid collection with a recent date of last activity can be more damaging to your credit score than an unpaid collection that is very old. Additionally, because items stay in your file for seven years from the date of last activity, paying this account off will restart the clock.
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.
If you are considering a bankruptcy, one of the first steps would be to speak with your creditors. In today’s environment they are much more likely to be willing to negotiate with you. If you can avoid filing bankruptcy, in most cases this is the best course of action.
- Myth Four: Something accurate can never be removed from my credit file.
Truth: When you dispute an item, the credit bureau is required to verify that they are reporting accurately. Under the Fair Credit Reporting Act, the lender has only 30 days to verify the account before the credit bureau must remove it from your file.
This means that if the creditor misses the cut-off date, the disputed item must be removed, even if it is accurate! The easiest items to take advantage of this are items that are older and things that were once past due but are now completely paid off. The reason for this is that your information can be difficult for the lender to find and they are much less motivated to take the time to verify than they would be if the item was currently in collection or past due.
Knowing what to do is half the battle in achieving your ideal credit score.