People are facing tough financial choices these days, but those choices are easier with an understanding of how the credit score system works. Many times credit scores are needlessly lowered through misunderstandings. There are three common misconceptions to dispel:
Misconception No. 1: Paying late didn’t hurting my credit, since I’m caught up now.
Recent late payments are credit score killers, and being caught up does not change the fact that you paid late. Anything other than “paid as agreed” on accounts on your credit report hurts your score.
Misconception No. 2: Dollar amounts matter in credit scores.
It may seem intuitive to pay the highest bill first, but dollar amounts do not matter in credit scoring; ratios and recency do. A late payment of $1 has the same effect as a $1,000 late payment. The fewer late payments on your credit report, the higher your score—regardless of dollar
amounts. Consumers should try to pay all their bills on time, every time.
Misconception No. 3: Closing credit card accounts always helps the score.
If you cancel a card, you may have lost your chance to increase your score by continuing to build on years of positive credit. Long-term positive account history can actually boost your score. It’s best for your score to keep cards open and active, using them for small purchases. The next-best tactic is to keep them open, with a plan to use them later to build your score back up.
Don’t make a bad situation worse.
In tough economic times, people often buy more on credit than they normally would. The amount they pay in interest on these purchases is largely determined by credit scores. Poor decisions that lower scores, combined with an already tight budget, can make money problems worse. Consumers need to get through these tough times with as little financial damage as possible.
Good credit is an important part of financial security and must be considered when making the best long-term decisions. Having the right information is necessary to make sound choices—now more than ever.
Compiled by Eddie Johansson, president of Credit Security Group. Eddie Johansson is national credit score analyst, providing advice to news organizations such as Fox News, ABC Network Radio and to business journals and financial publications. Credit Security Group serves consumers and lending organizations and advises banks, mortgage lenders and their clients on how the system works and how to use this knowledge to improve scores. The company has offices in Dallas, Houston, Longview and Nacogdoches, Texas.
Provided as a public service by the Indiana Bankers Association. This information is provided with the understanding that the Association is not engaged in rendering specific legal, accounting or other professional services. If specific expert assistance is required, the services of a professional should be sought.
