11 Credit Report Myths for Mortgage Monday

1. Paying my debts will make my credit report instantly pristine.

A credit report is a history of your payments, not just a snapshot of where you are at the moment.

2. Credit counseling always destroys my credit score.

Attending a credit counselor’s debt management program is not considered negative in the scoring models. However, if the credit counselor negotiates a lesser contractual obligation, the lender decides how it wants to report that. So if your $500 monthly payment is refigured for $300, the creditor may either legally report that $200 in arrears every month or reward you for not filing bankruptcy by reporting the account up to date. The credit score system ignores any reference to credit counseling that may be in your file.

3. Canceling credit cards boosts my score.

The myth is that they look ominous to potential lenders. Reality is that paying your bills on time and not being overextended is more important than having $5,000 worth of available credit on a card your are not using.

4. Too many inquiries hurt my score.

Once upon a time, this statement was true. In this millennium, the credit agencies recognize a shopping mind-set when they see one. If a batch of mortgage or car loan inquiries arrives within 30 days, it doesn’t have much effect.

5. Checking my own credit report harms my standing.

The reporting agencies distinguish between soft and hard pulls. When a major store calls to check before issuing its line of credit, the agencies chalk that up as a hard pull and it counts against your score. Personal requests and credit counselors, if they do it correctly, fall under soft pulls, which do not reflect negatively on the evaluation.

6. Credit scores are locked in for six months.

When calculating a score, for all intents and purposes it then goes away and is recalculated the next time someone pulls your credit.

7. I don’t need to check my credit report if I pay my bills on time.

When the Consumer Federation of America and the National Credit Reporting Association analyzed credit scores in the summer of 2002, they discovered that 78% of the files were missing a revolving acount in good standing, while 33% of files lacked a mortgage account that had never been late. A full 20% contained conflicting information on how many times the consumer had been 60 days late on payments.

8. All credit reports are the same.

Way wrong. These days, most creditors across the country do not report their information to all three major agencies: Equifax, Experian and TransUnion. And, because they are separate companies, the speed in which they update records isn’t necessarily equal.

9. A divorce decree automatically severs joint accounts.

By law, a creditor can not close a joint account because of a change in marital staus, but can do so at the request of either spouse. A creditor, however, does not have to change joint accounts to individual accounts. The creditor can require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you credit. In the case of a mortgage or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.

10. Bad news comes off in seven years.

Some of it does. Chapter 13 (reorganization of debt) disappears seven years from the filing date. For Chapter 7 bankruptcy (exoneration of all debt), the window is 10 years from the filing date.

Charge off records — When a creditor or lender charges-off your delinquent debt as a loss, a record appears on your credit report. This record remains on your credit report for 7 years.

Collection RecordsCollection records expire 7 years after the last 180-day-late payment that led to the account being sold to collections. This expiration date is the same even if the account was sold to another collection agency.

Closed accountsClosed negative accounts will expire after 7 years.

Foreclosure records7 years.

InquiriesRecords of credit and loan applications will remain for 1-2 years.

JudgmentsCourt decisions such as child support, civil and small claims judgments will remain on your report for 7 years from the filing date.

Late paymentsRemain for 7 years. Only late payments that go beyond 30 days will continue to have a negative impact for all seven years.

Repossession recordsVehicle and property repossession remains for 7 years.

Tax liensTax liens can remain on your credit report indefinitely if left unpaid. Once the lien is paid, the record remains on your credit report for 7 years from the paid date.

11. I can always pay someone to fix or repair my credit.

Yes, you can clear up erroneous information posted to your account, such as a repossessed car that you didn’t purchase in the first place. But if you paid your major store bill three months late in 2004, that’s a hard fact. Companies claiming to fix your credit deliver on their promises by generating a flood of dispute letters to the credit reporting agencies, which in turn ask the creditor to verify or document the entry. If they cannot, the listing must come off at that time. But if the creditor later does verify or document it, the agency slaps it right back into the file after 30 days.

Note: Credit bureaus credit scoring methodologies are trade secrets and are undisclosed to the public. As such the above recommendations should be considered general guidance and may have varying effects on credit scores.

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