Credit Score Myths

There is a ton of misinformation out about what does and doesn't hurt your credit score. The surprising thing about this is the sources of this misinformation: credit advisors, mortgage brokers and auto finance managers. These people should know better!

I must say, there are also many professionals out there that really know their stuff and offer great advice to their clients. Be careful who you take advice from when that advice directly affects your credit score and ultimately how much obtaining credit will cost you. Bottom line, if your source for credit advice gives you any of the following misinformation, get a new source.

Myth #1 Closing accounts will improve your credit score

Wrong, Wrong, Wrong. Closing accounts does not help your credit score it will lower your credit score! Having a large number of revolving accounts (credit cards) open will in fact lower your score. Once that has happened, it has happened and the damage is done. Closing a few of your revolving accounts does not correct the damage.

One of the factors that determines your credit score is the length of time you have had credit. Closing older accounts will make it appear as though you have had credit for a shorter amount of time, therefore lowering your score. To make the best of the situation, it is a much better move to payoff as many credit cards as you can. That will increase your balance to high credit available ratio. The conclusion from most lender's scoring models is that you have a high number of revolving credit accounts but you don't abuse your credit and you don't have a large number of accounts with balances or high balance to available credit ratio. If you have a large number of revolving debt with balances your credit will in many cases score in a lender's system as being a high risk for future bankruptcy.

The best move, pay off as many revolving accounts as you can and do not close any accounts.

Myth #2 Checking your credit score lowers your score

By obtaining a copy of your credit report directly from Equifax, Experian and Transunion you will not lower your credit score. I highly recommend that you check your credit often. You can check what is on your credit and See your credit score on FreeCreditReport.com by clicking here. FreeCreditReport.com is a service offered to consumers by Experian. I personally use Equifax's Credit Watch Gold 3-in-1 service and you can Get Equifax Credit Watch Gold 3-in-1 Now! by clicking on the link. Both offer a great service to consumers and it's important that you know what is on your credit and what your score is.

Applying for new credit will temporarily lower your score. You can minimize the damage caused by credit inquiries by shopping for new credit over a very short period of time. Multiple inquiries in a 30 day period are treated as just one inquiry. Don't shop till you drop, do your research first, then choose your lenders and minimize your inquiries.

I am amazed by the number of people who go from car dealer to car dealer shopping for the best deal and allowing each dealer to submit their credit. I have seen people end up with 30, 40, 50+ inquiries while trying to find the best deal. Listen up people, that will lower your credit score and destroy your chances for the best loan rates and terms. Don't do it.


Myth #3 Chapter 13 bankruptcy is better than a Chapter 7 bankruptcy

This cannot be farther from the truth. I have been in the auto finance business for 22 years and I can tell you this is false. People think when filing bankruptcy that they are doing the best thing by paying back as much of the debt as they can. Wrong. I know this may be hard to fathom, but filing for Chapter 13 is not the best plan.

Right now, I use 14 special finance lenders and only 2 of them will even consider a loan for a person who has an open Chapter 13. If the bankruptcy is open, you have to have permission from your trustee to make an installment purchase. If the loan is approved, the loan parameters are very difficult and the interest rate is 24.99%! If the Chapter 13 is discharged, there are a couple additional banks that will consider the loan but the parameters and rates for the loan only improve slightly.

A person who files a Chapter 7 bankruptcy and it is discharged has many more options. Many banks will consider offering a loan and the parameters and rates are much much better. You may even qualify with a primary lender instead of a sub-prime lender. Rates can be as low as 9% and the terms, such as downpayment can be as low as zero down.

The bottom line, pay your bills on time, correct errors on your credit reports, pay down your debt and apply for credit sparingly.