You have heard it all before and now you have a pretty good idea on how to get and maintain good credit with the basics. I am writing this article to let you in on a few of the things that are still being kept a secret in the credit industry.
Everyone knows that you should use your credit cards wisely. We have all had it drummed into our heads for years now that we should only take the cards with the lowest interest rate and no annual fee. We should call our card companies and demand the lowest rate and annual fee and they will instantly give it to us because we are good customers.
Hogwash. Credit card companies these days can pick and choose who they have as a customer and with the advent of the “pre-paid” or “secured” card, there are even more consumers carrying credit cards than ever before. The rumor that people are cutting up their cards in droves is just that… a rumor. It is up to you, the consumer to be informed and to do your homework when choosing credit.
One thing the credit bureaus and credit card companies both fail to tell the average consumer is that even if you make all your monthly payments on time and you pay at least the minimum each month, you can still be harming your credit rating. What they fail to tell you is, every month that you go over 50% of your limit in charges (30% for some cards), your credit score actually goes down. Credit bureaus actually penalize you for borrowing over 50% of your credit limit because it “appears” that you are a bad risk who is living beyond their means, therefore in danger of default. So in example, if your limit on your Visa card is $5,000.. the moment you charge up $2500, your score will drop that month between 10-100 points.
If you go over limit, not only do you incur over limit fees from the card company but your credit score takes yet another beating. These issues aren’t as easy to recover from either. It takes anywhere between 30 and 90 days for your score to bounce back after any negative has affected it.
Another thing that credit bureaus don’t tell you…paying off old collections and debt can actually harm your credit more than it will ever help.
Don’t get me wrong – I firmly believe you should pay all of your bills as soon as they are due or as quickly as you can thereafter. However, we all know that sometimes life gets in the way,debts will slip through the cracks, and sometimes we have to choose having a place to live instead of paying a medical bill. Bad debts stay on your credit for 7 years. Bad Federal debts (tax lies,bankruptcies, and student loan defaults) stay on your credit 10 years.
So let’s say you had a medical bill that went to collections 5 years ago and your conscience got to you and you decided to pay it off. Admirable! However, this could totally wreck your credit temporarily and cause you harm if you are doing this in anticipation of buying a home in the near future. Whenever you iniate any activity on your credit, your score will be affected. The old saying -“Let sleeping dogs lie.” definitely applies to paying off old negative credit. Once you pay it off, it triggers activity on your negative report and your score drops. This will be take 30 – 90 days to bounce back. Sometimes it affects you negatively for longer. There is no magic formula to know what will happen.
The original debtor has written off the debt as bad, gotten paid by their insurance company or taken a tax break, and put a smudge on your credit. Sure, paying off the original debt IS the right and honorable thing to do. But at this point, who wins?
I would suggest that if your conscience is still bothering you, take the amount you would have used to pay the old debt off and donate it to charity.
One last thing that credit bureaus never tell the average consumer. You constantly see those commercials for “debt counseling” services all over tv. It sounds like a good idea when you’ve gotten yourself in over your head with credit card debt, right?
WRONG!
While credit and debt counseling IS a good idea for everyone, going to a professional credit/debt counseling service is NOT. These companies charge a fee to do exactly what you can learn to do by taking a free class at your local learning annex. They also do not tell you that once you sign up with their services, it will be reported to your credit bureaus and almost every major mortgage lender views it the same as a bankruptcy. You are still seen as a bad risk. You are seen as someone who can’t control their spending and who is at risk for bankruptcy or worse, foreclosure.
Is that necessarily true? Probably not. In this author’s humble opinion, asking for help is a sign of a step in the right direction but unfortunately, lenders don’t see it the same way.
Having and maintaining a good credit rating is the backbone of your life honestly. It determines your ability to buy a home , a car, furniture, etc. It can also affect your ability to get the right job etc. Credit is definitely a balancing act and all consumers need to arm themselves with knowledge and learn the basics to keep themselves on the “good side of things”.