Fatal Credit Mistakes

There are quite a few things we do as consumers that have an impact on our credit rating or credit scores. You may have a perfect history of never being even 30 days late paying a bill, and yet you can drive your scores down simply by doing the activities outlined here in this special article. The following summary will keep you from making some of those same mistakes so you don't have to go seeking credit repair:

1. Never pay off old tax liens, collections, judgments etc. until the closing of your mortgage loan or after.  It can most often be done as part of the closing so ask your mortgage lender about proper timing.

If you make any attempt to pay these debts off prior to applying for a mortgage, it brings that delinquency or derogatory account from being reported as an “old account” (even if it is only a few months old) into showing “new activity” on your credit report. Yes, it is no longer an OLD account, but now a CURRENT and NEW account, due only to the recent activity. These old tax liens, collections, judgments etc. etc. are now treated and scored as new and recent accounts with delinquent activity. This will drive your scores down!

2. Contrary to what some of the so-called experts tell you, closing accounts (inactive or not, with zero balances or not), will not raise your credit scores.  In fact, closing those accounts can in fact lower your scores!  Again, this is due to it appearing as new and recent credit activity. ANY NEW AND RECENT ACTIVITY OF ANY SORT WILL AFFECT YOUR SCORES INITIALLY.

That said, after you close inactive credit card or other debt accounts that you don’t really need, the scores will eventually start to come go back up as a result of having less credit risk or potential credit risk versus having too many accounts and credit available.

The major problem is that most people do this just ahead of applying for a loan thinking it will improve their scores.  It can actually take months for the scores to be adjusted upward. In long-term planning, definitely take a look at all your open credit accounts and decide if you really need them all.   Unless you are planning to apply for a mortgage immediately after you start closing accounts you can benefit from cleaning them all up.  But remember, initially your scores will drop due to the new activity so plan well in advance.

3. Before applying for loans or to repair your credit - keep balances low on credit cards and all revolving debt. Maintaining balances under 30% of the available credit on each card can improve your scores. (e.g. if the available credit on a card is $1000; keep the balance under $300).  Pay off debts rather than moving it around to other revolving accounts. In fact, moving it around (for instance, moving balances to zero or low interest credit cards) can actually lower your scores.  I have to admit I am guilty of this one as those 1.99% APR rates are very attractive.

With all the offers for low initial rates flooding the mail, many consumers are moving their credit card balances over and over again, trying to keep their accounts at the lower rates. But remember, this counts as a new open account and new activity on your credit report.  Unfortunately, the result will be lowering of your credit scores.  Also, do not open new accounts you don’t need trying to increase your available credit as this can backfire. One needs to open only four credit accounts to establish great credit scores!

4. Apply for credit only when you truly need it. This is a common mistake made with department store promotions, for example.....the offer to get 10% or 20% off by opening an account may look like a great deal, but can be detrimental to your credit scores.

Do not open accounts thinking it will raise your score, as most likely will not help at all.  Go ahead and have credit cards, but use them wisely.  Lenders see that someone who has a good history of responsible credit use is a lower risk than someone with no credit cards at all.  There needs to be a blend of installment credit (cars, furniture, etc.) along with credit cards and mortgages. This blend of the types of credit will also help your scores.

5. If you have ever had a tax lien, collection, or judgments etc., don't assume the creditor, collection agency or taxing body will report the resolution to the three major bureaus. This is a big mistake! That goes for erroneous reporting you may find on your report too.

Don’t assume that just because you paid off a collection, judgment, or lien that this fact has been immediately reported to the bureaus. Even when you close an account, it is often reported as such to all bureaus on a timely basis. It is not uncommon to see such activity reported to just one bureau, even when the adverse account was being reported on your credit report by two or all three bureaus. Unfortunately, agencies and creditors are quick to report you when you own them money or have made a recent mistake, but they can be very slow to report the final resolution to that account when you have paid them off.  Collection agencies and the creditors that have sold your account to the collector, are both extremely poor at taking the final step and reporting that the account is paid in full.

This problem is exacerbated when there has been a bankruptcy!  Quite often, accounts that have been involved in a bankruptcy have been bantered about between the creditors and various collection agencies long before the filing for bankruptcy protection. The creditor is reporting the account as delinquent and that account is then considered a “charge-off”.

At the same time, the creditor has sold the “bad account” (sold the paper) to a collection agency, in hopes of getting just a small percentage of their loss back if the agency is at all successful in the collection of a bad debt. This goes for credit cards, department store accounts and even installment loans like auto loans. The “paper” (account) is sold back and forth between creditors and agencies as they go from having a delinquent pay history, to that of no payments being made at all.

The problem is that between the time one files for bankruptcy protection and the time it takes to successfully bankrupt the debt(s), the accounts may be sold multiple times. In addition, it is not uncommon to see an account go to collection AFTER it has been discharged in a bankruptcy. You are thinking that you have a fresh start to rebuild your credit after the bankruptcy, yet there may be new collection accounts dated after the discharge which has a huge impact on your already-damaged credit scores.

In addition, just because you may have been successful at having certain debts discharged in a bankruptcy, don’t assume the discharge of that debt is reported as such on your credit report. In fact, less that 50% of the accounts, collections and/or judgments discharged in a bankruptcy will show as such after the completion of the bankruptcy. You have to, again, follow up with each individual bureau and supply to them copies of your discharge and list of creditors to insure that it is reflected accurately on your overall credit report. It can take years, rather than months, to see a rise in your credit scores if you don’t follow the steps as outlined above.

It is your responsibility to follow through with any such activity and make sure that all three bureaus have the most recent and accurate information possible. You can write and/or file online disputes with each individual bureau and supply copies of paid receipts and any correspondence you may have to insure that your record is recent and correct.

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