"I heard this…."    "Somebody told me that….."  We get this all the time when it comes to fact and fiction about consumer credit issues.  So today's article features the first installment of Credit Myths, along with the facts.

After credit reports and scores became available to consumers following decades of secretive, financial-industry-only use, there have been untold amounts of information talked about and printed.  With the increase in consumer awareness over the past several years, and the desire, and necessity, to strive for higher credit scores, it is more important than ever to become credit-wise and get accurate information to improve your financial fitness.

1) PAYING CASH FOR EVERYTHING GIVES YOU A HIGH CREDIT SCORE

Not necessarily.  There has to be something for the credit formula to evaluate.  So if someone has never had a credit card, retail store account or gasoline card of any type; if they have never taken out a mortgage, auto or student loan; if they have never had a personal loan or line of credit in their name, they probably don't have a credit score.  This is called a "thin file" because there is not enough there to develop a score from.

Now, if someone has been using cash only for five or six years and had any old, closed accounts listed above, they probably have a score.  Remember, closed accounts in good standing can remain on your credit file for up to ten years, which is a good thing as they help your credit rating.  Click here for a list of how long things stay on your credit.

NOTE: If you have always paid cash with no credit accounts AND there are any collection items or public records in your credit file, you likely have a score.  Probably, a low score.

2) CHECKING YOUR OWN CREDIT HURTS YOUR SCORES

No.  When you check, or pull, your own credit report, it is considered a Soft Inquiry and does not count against you.  When you authorize someone else to check it, a credit or loan application, it is a Hard Inquiry and can be anywhere from 1 to 12 points each against your scores. 

NOTE: The scoring formula does allow for 'rate shopping' when applying for real estate or auto loans.

3) THERE IS NO NEED TO CHECK YOUR CREDIT IF YOU PAY ALL YOUR BILLS ON TIME

False.  A 2004 study found that 79% of credit reports contain errors.  Usually, the errors are not in the consumers' favor and are hurting their scores.  We strongly recommend establishing your personal credit monitoring schedule and then following it.  When you find an error, contact all three credit bureaus to correct it, even if you only checked a report from one bureau.  Most national companies pay to report to all three, so chances are that error is on all of your credit reports.

NOTE: Your no-cost credit reports can be found here.  Beware of the ones advertised on television; they are NOT the ones the government says we get each year.  More info and a video here.

4) CANCELLING AND CLOSING CREDIT CARDS HELPS YOUR SCORE

No.  Not usually.  Open, revolving accounts in good standing can have a positive impact on four different parts of your credit scores.  When you close those accounts, you can potentially have a negative impact on your scores.  Some people say, "I don't shop there anymore" about old, store charge cards.  Or "I don't bank there anymore and haven't used that card in awhile". 

We recommend setting up a schedule to use your older accounts as Credit Building Tools.  And we have increased the frequency of this strategy due to the credit card industry's continuing practice of closing dormant accounts and decreasing credit limits on existing accounts.  We suggest using your credit cards THREE times a year for a small purchase of something you were going to buy anyway, like a tank of gas.  Then pay the bill IN FULL as soon as it arrives.  This should keep your account open and active and working as a tool to build your scores.

5) YOU SHOULD ALWAYS CARRY A BALANCE ON YOUR CREDIT CARDS TO HELP YOUR SCORES

False.  There is some speculation that this myth evolved from the credit card companies themselves; the more balances there are, the more money they make.

It is okay to have little or no balance on your credit card accounts.  This impacts the second largest part of your credit score, the Amounts Owed or Utilization Ratio.  When revolving account balances are over 50% of the credit limit, scores usually go down. Keeping balances under 30% of the credit limit is optimal.  Using the accounts as Credit Building tools, see #4 above, should keep them active and included in your scores, even without balances.

When you are ready for your Personal Credit Building Plan to identify opportunities and strategies to build your credit scores, order your Credit Analysis today.