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Liz Eckert's Blog

By Liz Eckert | Agent in Fairfield, CT

Common Credit Mistakes

Mistake #1: Paying off old collection accounts believing it will improve one's score

After six months of inactivity, the impact of a derogatory statement lessens dramatically. Making a payment on an old collection makes that item active again and can actually impact your client's credit score negatively.

Solely in the interest of impacting a credit score positively—for instance, for the purpose of securing a mortgage—it is important to recognize that the greatest damage has already been done to the credit score through the initial nonpayment on that account. Making the account current again would have an additionalnegative impact on your client's score. Once the client has gotten the mortgage loan, he or she can go back and make the outstanding payment(s) on the account, in order to build a better score for the future.

Mistake #2: Filing bankruptcy or using credit counseling as a means to improve credit

A bankruptcy stays on a person's credit report for up to ten years and has a great impact on his or her credit score. As discussed earlier, in a Chapter 13 bankruptcy, your client would still have to pay off the debt, creating potentially more derogatory statements in addition to the bankruptcy.

If your client has had credit counseling, it not only indicates that he or she could not handle having credit, but it also shows that instead of paying what was owed, the person had someone negotiate a lesser amount to pay. Creditors do not like to think that they are not going to get the full amount owed to them.

Mistake #3: Applying for new credit to consolidate debt

Applying for new credit can negatively impact your client's credit score in a number of ways.

First, every time your client applies for credit, points are deducted from his or her credit score. Second, acquiring new credit indicates that the individual may not be able to handle the debt he or she already has. Third, newer accounts lower a person's average account age, negatively impacting the credit score. And finally, when consolidating debt, your client runs the risk of taking on more than 20 percent of his or her credit limit. (All of these instances and their impact on credit scores are discussed in more detail in Unit 4.)

Mistake #4: Canceling old credit cards to increase credit score

The length of credit history impacts 15 percent of a consumer's credit score, and canceling old credit cards would make your client's credit history appear shorter, thereby decreasing the overall score.

Mistake #5: Taking out mortgage loans to pay off debts

While it is good to have a mix of different types of credit, it is not necessary to have every type. Having too many mortgage loans can make it appear as though your client is overextended.

Every time your client authorizes a creditor to pull a credit report, he or she loses points. The credit report will show all the times it was pulled, but it does not attach a note that says, "Sally declined the credit from this creditor because the interest rate wasn't low enough." It only shows that Sally was asking multiple creditors to extend credit to her.

Mistake #6: Shopping for credit to get the best interest rates

Every time your client authorizes a creditor to pull a credit report, he or she loses points. The credit report will show all the times it was pulled, but it does not attach a note that says, "Sally declined the credit from this creditor because the interest rate wasn't low enough." It only shows that Sally was asking multiple creditors to extend credit to her.

Mistake #7: Not using credit cards at all in order to raise one's credit score

If your client does not use a credit card for six months, it becomes inactive. Once it becomes inactive, it ceases to contribute to the client's credit score. It is better to have an active credit card in good standing with a small balance.

Mistake #8: Using a small amount of credit and then paying it off before receiving a bill or paying it off in full at the end of the month to increase one's credit score

If your client fails to carry a balance on a particular account, the creditor will not report the account to the credit bureaus. An account that is not reported is an account that is not helping your client's credit score.

Mistake #9: Believing paying accounts on time will automatically fix a credit score

The greatest impact of late payments on a credit score happens during the first 30 to 60 days of being late. After that, the impact lessens. When your client makes a payment on such an account, it makes the account current and brings it to the "top of the list" again. Basically, your client has put a spotlight on his or her poor payment history, which is 35 percent of the credit score.

This is similar to Mistake #1. Let's say a 30-day late payment impacts a person's score by 50 points. Then, a 60-day late payment deducts another 40 points. After that, those two late payments may only affect the score by 5 points, because the newer a delinquency is, the greater its impact. Once the damage is done, your clients cannot go back and fix it just like that. They should keep making their payments but must recognize that just making the payments on time will not erase the negative impact of previous late payments.

Mistake #10: Applying for new credit cards to drive a credit score up

Having a credit report pulled when applying for new credit will, in fact, deduct points from a person's credit score. In addition, securing new credit can also have a negative impact on your client's score by lowering his or her average account age.

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