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Top 6 Consumer Credit Report Myths
By EchoBay Loans Staff Writer

With the impact that consumer credit reports have on people's financial lives, it's not surprising that many myths abound regarding how credit reports and scores work. The following are 6 of the top consumer credit report myths, selected for their power to keep your credit scores optimized and your fears minimized by knowing the facts.

1. Consumer credit counseling is as bad as bankruptcy

Updated scoring models at Fair, Isaac & Company (FICO), the company that developed the credit scoring systems used by the credit bureaus, no longer penalize consumers for entering consumer credit counseling.
In fact, it's much worse to show continued late or missing payments or a bankruptcy than seeking credit counseling. Are you in a difficult spot with your payments? Pursue the credit counseling option and ease both your mind and your credit report.

2. 60 days late on a payment is not much worse than 30 days

Watch out for this fallacy. The moment you have a 60-day late on your consumer credit report, your score drops significantly. That's because the score models know that the risk of defaulting on an account goes up by a wide margin when a customer moves from 30 days late into the 60-day late category. Steer clear of this problem if at all possible.

3. Debt consolidation is always a good thing

Offers to refinance your existing credit cards or home loans appear to give nothing but benefits-lower interest rates, closing unnecessary accounts and saving lots of money. What many people don't realize is that closing existing accounts and opening up a new one, usually with a much higher balance, gives the scoring models lots of triggers that hammer your credit score.

First, having fewer credit open accounts generates a lower score than having a moderate number of accounts, which tends to raise scores if the balances are kept in line. The second and third dings to your score occur at the point of applying for the new credit account (which triggers an inquiry) and then having the new account opened, which usually drops the score a bit for 12-13 months. Then, you load up the new account with balances from your other accounts. If it adds up to more than 50% of the credit line, you'll activate the "proportion of balances to credit limits too high" scoring factor. Down goes the score again.

Now cash is cash, and even with these scoring results, consolidating can still make better financial sense. Just look carefully at whether you'll be buying a house in the near future where you'll be charged thousands of dollars more over time for the lower score.

4. As long as I pay my minimum payment on time, it doesn't matter what my account balance is

One of the most frequently seen scoring factors faced by mortgage borrowers is the "proportion of balances to credit limits too high" factor mentioned above, according to Advantage Credit, a large mortgage credit reporting company. If you have even one credit account carrying more than a 50% balance, you'll be penalized on your consumer credit report. If you have more than one, the score effects get even worse. Keep your balances under the 50% mark, pay your bills on time, and you'll be in good shape.

5. If I order my consumer credit report my score will go down

Fortunately, this isn't true. Inquiries from consumers about their own credit reports, along with inquiries from companies that request data for pre-screened credit card and related offers, as well as inquiries from prospective employers, count zero against a score. So don't let this myth stop you from performing due diligence in your regular credit report review.

On the other hand, when you apply for any new credit account voluntarily-store, gas, auto, mortgage, credit card-a "hard inquiry" is posted to your file. A few inquiries will not materially affect your score (a point or two each), but many inquiries in a short time show the likelihood that someone's in trouble and will produce larger score drops. So apply for and open new accounts conservatively. Also note that scores take "rate shopping" into account for home & auto loans, and all inquiries within a two-week period of the first inquiry in those categories count as a single inquiry.

6. Paying off old collection accounts or liens will raise my score

This is strange territory. You'd assume that paying off old collection accounts, judgments or liens would remove them from your consumer credit report and help your score. But the entries stay unless they are in error. What's worse, paying off an account today makes your previously old judgment jump into the present for scoring purposes. The "date of last activity" advances to the now, and that makes it look like the derogatory entry has just occurred, sending your score way down.

It's right to pay off old debts, but make good on them after your mortgage lender requires it, not before. That way, you get the benefit of the higher score initially, the better home or auto loan, and can then rest in good conscience as you put old problems to bed.

Advice comes from all quarters on credit reports. The best advice is to do your research where the most experience lies. The national credit bureaus, mortgage brokers & lenders who have been in the business a long time, Fair, Isaac & Company, the FTC or credit report resellers with a solid track record will be able to best guide you in learning the truth about your consumer credit report.

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