The Basics of Credit

The Basics of Credit

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The meat of the article explains how credit scores are produced and managed by the three major credit agencies, information that is crucial for both gaining and keeping access to credit.

Urban Legends Regarding Research

Repeated credit applications raise red flags for credit bureaus, as explained in "The Larry Rule." However, the Larry Rule is not without its exceptions. To begin, several inquiries for the same objective, like comparing mortgage rates, are treated as a single query. Second, it does you no harm to check your own credit report; only credit applications (and not simple queries) show up on your credit report and are considered to be negative activity. Inquiry information is only stored for a maximum of six months. In other words, the time restriction for filing a claim under the Larry Rule is six months.

The aforementioned relaxations of the Larry Rule are excellent news for shoppers. There are some less-than-pleasant parts to this article. You could think, for instance, that approval from you is required before someone can check your credit. Unfortunately, except in the context of the workplace, this is not true. Your credit report can be seen by potential lenders, insurance companies, landlords, and pretty much anyone else.

Myths About Credit Restoration

There's a common misconception that paying off debts instantly raises a person's credit score. There are numerous credit repair myths, unfortunately, including this one. While it's true that a paid debt is better than an unpaid responsibility, missed payments and past delinquencies can still hurt your credit score, and paying off an old debt could not help your score by more than a few points at most.

The good news is that negative information about past-due payments and delinquencies will be erased from credit reports after seven years. Credit repair myth number two: bad information disappears after seven years. However, a Chapter 7 bankruptcy will remain on your credit report for 10 years, and unsatisfied judgments may be there indefinitely.

Many people also believe the fallacy that canceling their credit card accounts will improve their credit. Most distressing of all is the widespread belief that closing an existing account prevents one from starting a new one. Actually, your credit score will rise if you keep your accounts open, active, and current. The percentage of your credit limit that is available to you (your credit utilization ratio) is a positive indicator of your creditworthiness.

Credit Counseling Urban Legends

Many people's preconceived notions about credit counselors and debt management programs have been validated over the years. One such misconception is that it's possible to "repair your credit" by paying a service. You should stay away from any company that offers this "hands-free" service.

However, trustworthy organizations do exist to provide assistance in the form of credit counseling and debt management. And contrary to popular belief that employing such a service can negatively impact your credit, many of these organizations are actually able to lower their clients' debts while maintaining or even improving their clients' credit scores. It's important to find a credit counselor who cares about both reducing your debt and improving your credit score.