More Credit Repair Myths and Misconceptions
More Credit Repair Myths and Misconceptions
This is the second part of what I suspect will be a never ending series devoted to debunking more credit repair myths and misconceptions. My first column on this subject (see link below) was written on 9/29/12. My readers who are serious students of the subject of credit repair know I am fascinated about the persistence of myths and old wives tales. It is appalling how some people repeat things they have heard as fact without using their capability of critical thought. The certainty with which they tell you what they “know” is amusing when you think about it. If only it wasn’t so harmful to the gullible it would be hilarious. Here are some of my favorite more credit repair myths and misconceptions.
- All types of credit count equally toward scoring. This is wrong. There is a “pecking order” regarding how much weight is given to each type of credit. The reasons why this is so are a little beyond the scope of this article. These reasons should be somewhat self evident. The pecking order goes like this:
- Real Estate Loans
- Installment Loans
- Credit Cards
- Retail store cards
- Denial of credit hurts my score. The hard inquiry made before the denial of your loan application is a negative factor for a few points that hurts you for a year from the date it was made. The denial itself has no effect. Dispositions of applications are not housed in the credit reporting agencies data bank.
- Too much available credit will be harmful to my FICO score FICO does not contain a negative component in its scoring algorithm to harm the score of people with too much available credit according to FICO spokesman Craig Watts. If your lender tells you this he must be in the small minority using one of the FAKO scores. Either that or he is using this as an excuse to deny you for other reasons. See my entry of 11/05/12 for more on this.
- Inquiries by collection agencies hurt my score. The Federal Debt Collection Practices Act does permit debt collection agencies to check your credit reports. These inquiries are not treated as hard inquiries. The Act forbids “abusive practices.” The debt collector has an account number and a member number with the credit reporting agency. The machine reading the data sees this code and the inquiry is nullified as far as its ability to negatively impact your score.
- Purchasing alcohol and/or spending with a credit card at “gentleman’s clubs” or massage parlors hurts my credit score. What you spend your money on is not stored in the credit reporting agency’s data base. It’s strictly a numbers game with no negative hits based on judgments about the morality of where you spend your money.
- Creditors have to accept $1.00 payments. This one is very persistent. They don’t unless there is a special provision in the contract. There isn’t. Why would you want to anyway? You would be freshening up an old debt when the new balance is reported and hurting your score more just because it is fresh.
- Debt Settlement companies can repair my credit score. A debt settlement company takes your money, holds onto it and then tries to settle for a percentage of the total. In the meantime your score is being destroyed by month after month of delinquency. You could do this yourself if that’s what you really want to do. Debt settlement companies are a terrible option for those in trouble. There’s no upside to this at all.
- Opting out of credit card offers helps. These are soft inquiries and have no effect at all on your score. Opt out if they annoy you but it doesn’t affect your score one way or another.
- Hard credit Inquiries can be bumped off my reports by a series of soft inquiries.
Credit Inquiry “Bumping” explained
For those who don’t know what I’m talking about a brief explanation is in order. There are people who fancy themselves as experts in the fine points of gaming the credit repair system who would have us believe that each credit agency only has a certain amount of file space to devote to each credit report. A “hard inquiry” is an inquiry generated by a lender who, with your permission, takes an official look at your credit report. A “soft inquiry” is an inquiry by you yourself, a lender who wishes to make you an offer, a landlord or someone who is not actually looking to lend you money such as a prospective employer. A hard inquiry costs you a few points for a year after it is made. A soft inquiry does no harm.
Proponents of this technique maintain that as your allotted file space becomes maxed out the credit reporting agency will drop the older information off the report to make room for the new information on a “First in, First out” basis. In theory, your soft inquiries will fill the inquiries section of your file if you make a continuing series of soft inquiries. The new harmless inquiries you make will push the older negative ones off. Is it possible there’s something to this?
Let’s get real. In the first place mortgage and insurance inquiries are coded in such a way that this could never work. Those who advocate this practice also severely underestimate the file capacity of the credit bureaus. Generating too large of a file could cause it to be split making it impossible to ever know for sure which one would be pulled. Deletions might only go to one file and stay on the other. Older accounts could be dropped off that help your score immensely.
If anyone knows of an instance where this practice has been successful I’d love to see the proof.
Don’t Let Inquiries give you Stress
But let me leave you with this thought. People feel stress over inquiries far more than it’s worth. Inquiries are only bad for a loss of a few points depending on where you were in the first place. Even though they stay on your report for 2 years FICO only counts them for 1 year. They do not “age” within that year it is true. The little harm that they do is just as strong on day 364 as it is on day one. On day 366 it can hurt you no more with FICO.