For a long time I have listened to friends, acquaintances and clients talk about credit reports and credit scores.  And after many years I have found that most people I have spoken to, have only a vague concept of what a credit report is and what a credit score actually means. They have heard rumors or read information on the internet that is just plain wrong or at best misleading. So to help, the following is a list of common misconceptions regarding credit reports and their scores.

1.      Every time someone checks my credit or runs an “inquiry” my credit score will drop by 5 points.  I have to admit that I have heard this one several times, and until recently I believed it to be true. However, as it turns out, there is no specific “magic” number that drops when an inquiry is made. While your score is affected, the actual affect is relatively minor. Keep in mind however, if you run around town and apply for several dozen credit cards or credit lines, then there will be several inquiries made, and the net result will be a much more significant drop in your score.

2.       My overall credit score is affected by where I reside.  Wrong. Plain and simple. Where you live has no bearing on your score. Only how you are handling your credit goes to determine your score. And certainly not how much money you make. Which brings me to the next misconception…..

3.      Making a higher income will result in a higher score.  Well, honestly, I don’t have to worry about this one. Unless my lottery numbers finally payoff, this one is not going to be a real concern to me. But, it causes me a little comfort to know that, at least in this circumstance, rich people live by the same rules that I do. We have all heard of the rich and famous filing for bankruptcy. And of course, the old addage “The more you make, the more you spend”  Utlimately, your score is affected by how you manage your debt, not how much income you make. Don’t believe me?.. just ask Nicholas Cage.

4.      Using a credit counseling agency will lower my credit score.  Wrong. The use of the credit counseling agency does not affect scores. However, in most circumstances, by the time you decide to use this type of service, you are already delinquent with your payments and your credit score is already damaged. And even if that is not the case, any payments that are less then the required minimum, and/or a negotiated balance less than what is owed, will affect your overall score. So using credit counseling, in and of itself, does not hurt your score, but remember, anything outside of being current on your regular payments will.

5.      Filing a bankruptcy will be on my credit report forever.  Wrong again. Bankruptcy filings are reported for 10 years. At which time they drop off your credit report for good. And while it is reported as a negative on your report, the actual impact of your score lessens with time. Generally speaking, it takes two years to rebuild your credit score, after a bankruptcy filing, to a respectable score. But, make sure you do it correctly. (See our previous blog “Bankruptcy; Fact vs. Fiction”)

6.      Doing a Short Sale of my home is better than a foreclosure.  Not really. Both options are reported negatively on your credit. And the impact on your score is about the same. However, with a Short Sale you may wish to speak to a tax attorney to find out what, if any, tax liability you may be stuck with on your following tax returns.

7.      The “Perfect” Credit Score is 900….or 850…..or 800……. I have heard so many different numbers that indicate a perfect score that I am at a loss on this one. I think the key word here is “perfect”.  The highest FICO score that you can achieve is 850. But who cares?  If a bucket of chicken wings costs $15.00, who cares if I have a $20.00 bill? As long as I have the $15.00 then what’s the difference? No, I have not lost my mind, it’s just an example and I’m  running late for lunch and  KFC is sounding pretty good. Anyway…….if I am trying to purchase a home, and they require a minimum score of 720, then who cares if I have a score of 830? I still get the house right? Then in that case the “perfect” score for me and my situation is 720. See the connection with my chicken example?

I hope this helps when considering your credit report and it’s score. And by the way, it is important to review your credit report regularly for errors. You can get your report, for free, without signing up for some service that you don’t need at www.annualcreditreport.com .  You can get one report, per agency, per year for free. Toggle between the agencies and you can get them more often.  I run one every 4 months just to keep up to date. I will run Experian, then 4 months later run Equifax, then 4 months later run TransUnion. Then I start all over again with Experian.

Allrighty then…I’m off to KFC and an extra large bucket of wings!!!!!

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