On-Time Payments Heal All Credit Report Wounds
This is the time of year when many people make an effort to get a handle on their credit. But you might be confused about what actions can actually help your credit and those that can harm it. Consumer columnist Sheryl Harris joined Tell Me More host Michel Martin to share some tips and debunk consumer credit myths.
Tip: Understanding your credit report
- A credit report shows your credit and loan accounts, the balance owed on each account, and your payment history on each account.
- Collections accounts (unpaid past-due bills for even noncredit contracts, like cell phone bills) can also land on a report.
- All kinds of companies use credit reports to decide whether to do business with you, including property insurance companies, employers and landlords.
- A credit score is a grade based on the information in your credit report.
Tip: How to remove fraudulent information from your credit report
File a complaint with the Consumer Financial Protection Bureau. It will contact the credit report agency you're having difficulty with, and find out what the problem is.
Tip: Credit reports are free
You can get a free report by going to www.annualcreditreport.com, or calling 1-877-322-8228 (The Annual Credit Report Request Service).
Myth: Checking your credit report will lower your score
When you check your own credit report, or when a lender you've been working with checks your report, it's called a soft inquiry. Soft inquiries do not affect your score. When a lender checks your credit report in response to an application you've filled out for new credit, it's called a hard inquiry. Hard inquiries can lower your score if you have too many of them at one time.
Myth: You have one credit score that's constantly being updated
You don't have a single score, and the number doesn't constantly change. You only have a credit score when you or a company you do business with pays to run one for you. Your score isn't something you should worry about daily.
Myth: Closing a credit card account drags down your score
It's true that any change in your credit mix – adding an account or closing a paid-off account – will cause a dip in your score. But that's generally a temporary dip. One of the factors in a credit score is the amount of debt you have on your credit cards, versus the total limit on all your cards combined. If you have cards on which you owe large balances, you may want to keep cards with low-balance accounts open to lower your debt ratio and boost your score.
The best rule of thumb: If you have good credit, you can close accounts you no longer want --- as long as those accounts have been in good standing for a while and they've been paid off in full, and if you're not planning to apply for credit in the next six months. You don't want to fuss with your credit mix in that six-month period before you plan to apply for a home or car loan.
Myth: If you have bad credit or a bankruptcy, you'll never get credit again
People recover from bad credit all the time. You can get yourself out of a bad situation with time and on-time payments. An on-time payment means you're paying at least the minimum amount due (Ex: If the minimum payment is $25.00, and you only pay $23.00, that's not an on-time payment).