Most people don't know that they can hurt their credit scores even if they pay their bills on time almost every time. You should avoid these five common mistakes:
- Don't pay off old collections, judgments, or tax liens until the closing if you want to get a mortgage. (Ask your mortgage lender if you have to pay these debts when you close on your house.)
When you pay off these debts before applying for a mortgage, they are counted as new accounts with late payments. This hurts your credit rating.
- When you close a credit card account, your score goes down at first. Again, this is because what you did shows up as new and recent activity on your credit report. Any new or recent activity will make your scores go down at first.
After you close accounts that aren't being used or aren't needed, your credit score will go up because you won't have as much credit or credit risk. But this could take months to happen. Most people close extra accounts right before they apply for a loan because they think it will help their scores. Close these accounts well before you apply for a loan, if you want to.
- Don't keep a lot of money on your credit cards or other types of revolving debt. Your credit scores can go up if you keep the balances on each card below 30% of the available credit. For instance, if you have a $1,000 credit limit on a card, keep the balance below $300. Also, don't move your debt to another revolving account. Instead, pay it off. Moving balances to credit cards with no or low interest can actually hurt your credit score.
Many people move their credit card balances over and over again to keep their rates low. This is because they are attracted to credit card offers with low interest rates at first. This adds new information to your credit report and brings down your credit score.
- Don't try to get credit if you don't need it. People are tempted by promotions at department stores that give them 10–20% off their purchases if they sign up for a credit card. Even though it may look like a good deal, opening a new account will hurt your credit score.
Make smart use of credit cards. Remember that credit bureaus look more favourably on someone with a good credit card history than on someone who doesn't have any credit cards. To build a good credit history, you should have a mix of credit cards, loans, and instalment loans (for cars, furniture, etc.).
- Don't assume that the payment you made on a collection account, court judgement, or tax lien has been reported to all three credit bureaus. Also, if you close an account, don't assume that all three bureaus know about it.
Unfortunately, agencies and creditors will report you right away if you owe them money or made a mistake recently. But when you pay them off, it can take a while for them to report the final resolution to that account. Both the creditor who sold your account to the collector and the collection agency are very bad at telling the creditor that the account has been paid in full. If you've filed for bankruptcy, you need to be extra careful. Less than half of the accounts, collections, and judgments that are erased when you file for bankruptcy will show up on your credit report after the bankruptcy is over.
You have to make sure that all three bureaus have the most up-to-date and correct information about you. You can write them a letter or file a dispute online with each bureau. Make sure to give them copies of paid receipts and any other correspondence you may have so that your record is up-to-date and accurate.
Ron Cahalan has been in the mortgage lending business for 26 years. His new, controversial book, "Lenders Are Liars," shows what he calls the industry's greed and lack of ethics. It tells homeowners and borrowers what they can do to get the best rates and lower closing costs, among other important things they need to know.
