Most people don't give much thought to their credit... until they desperately need a good credit score to finance a dream home, a new car, or get a credit card. After the rejection letter, they start scrambling to find the "secret" to raising their credit score within 48 hours.
If you believe you can magically erase years of bad financial behavior off your credit file in just a couple of days, or even a month, you probably also think you can take a diet pill and lose weight by lying on the couch. Unfortunately, there's no "easy" button for good health or for building excellent credit scores.
Maybe your excuse for not staying on top of your credit is that you don't want a credit card or because you're a cash-only kind of guy or gal. While I appreciate that, having poor credit is still a drag on your finances. Here's why:
• Your insurance quotes will be higher
• Your security deposits will be higher
• You might not be able to rent an affordable apartment or home
• You can be denied certain government benefits
• You may be turned down for a good job
In other words, these days credit is about much more than just borrowing money. Credit files are tools that more and more companies are using to evaluate relationships with potential or current customers and employees.
Additionally, if you're out of touch with what's on your credit report, you might not realize it if you become the victim of a devastating identity crime. Checking your free credit report on a regular basis at annualcreditreport.com is your back stop for catching a slimy identity thief.
If you want to raise your credit score, here's the real trick: Get educated about how the credit system works. Then you'll know what levers to pull to make your credit score trend up or down over time.
A great way to start improving your credit is to get the truth on the following seven lies about credit scores that may be costing you:
Lie #1: You always have to pay for your credit score.
If you've shied away from getting your credit score in the past because you thought you had to pay for it, you're in luck. While your free credit report doesn't include your credit score, you can get your credit score for free.
Lie #2: Paying off old debt keeps it on your credit report longer.
Credit accounts with any negative information -- like late payments or being in collections -- stay on your credit report for seven years from the date you originally became delinquent, no matter when you pay it off. Accounts discharged through a bankruptcy remain on your credit file for up to 10 years.
Lie #3: Canceling credit cards boosts your credit score.
Canceling a credit card -- or any revolving account, such as a retail store card or line of credit -- is one of the most common credit mistakes you can make. Getting rid of an account reduces your total available credit compared to the amount of debt you owe. When your debt-to-credit ratio (also known as your utilization ratio) goes up, your credit score goes down.
Lie #4: You can't get a credit card if you have no credit.
It seems like a catch-22: You can't get credit without a good credit score, but you need a good score to get approved for credit. Fortunately, secured credit cards come to the rescue!
With a small refundable deposit on a secured credit card, you can also have the convenience of making purchases with plastic. Just choose one that reports payment history to the three nationwide credit reporting agencies so it will also help you build credit.
Lie #5: Checking your own credit lowers your credit score.
Inquiries on your credit file that come from you applying for credit are "hard inquiries," which temporarily count against you -- even if you don't get approved. But no matter how often you check your own credit report or credit score, it's considered a "soft inquiry" which never damages your credit.
Lie #6: You can pay an agency to increase your credit score.
You credit score isn't like a car that you can hand over to a repairman to "fix." The best way to improve your credit is to understand what factors are used to calculate credit scores and then to be strategic about improving them. And if someone offers to raise your credit score for a fee, walk away.
Lie #7: Settling an old debt for less is good for your credit score.
Settling an old debt will save you money, but it's costly to your credit. It lowers your credit scores and shows up in your file as "settled" instead of "paid in full," which can be a red flag to potential creditors.
However, as negative accounts in your credit history age, they have less influence on your credit scores. That means it's never too late to build a great credit score.