Myth Buster - Your Credit Score
Posted on October 14, 2016

Bohemia Blog by Agent David McDaniel



NYC landlords qualify potential tenants based on income and credit. Most landlords require proof of income of 40x the rent and good credit. Generally they look for scores 680 or higher, although some landlords have even stricter qualifications. Many of my clients are in the dark about their credit score and how credit works in general. There are many myths surrounding credit.

 

MYTH: I believe I have good credit.

FACT:  Believing and knowing are not the same thing, and you shouldn’t just assume your credit score is OK. Also, just because you had good credit five years ago doesn’t mean you do now. Surprises happen all the time! Here are a FEW of the more recent surprises my clients were not aware were in their credit report, and reflected in their score.

 

-$10 Library card fine!!! Even miniscule library fines can lower a credit score by as much as 50 to 100 points!!!

-Unpaid Parking Tickets and Utility bills.

-Unpaid Medical bills sent to collections. EVEN if those bills are an error and were supposed to be covered by insurance, they could be affecting your score. 

-Identity theft! Just because you pay the credit card bills you know about, doesn’t mean someone hasn’t opened an account in your name and isn’t making payments.

 

TAKE-AWAY: Better safe than sorry! Check your credit reports at least once a year! 

 

MYTH: Checking my credit report or credit score will reduce my score.

FACT: It’s true that if a lender checks your credit report or credit score, it results in a “hard inquiry,” which causes a small, temporary drop in your credit score. However, when you check your own, it’s called a “soft inquiry,” and it has no effect on your score. You are entitled to a free copy of your credit report every 12 months from each credit reporting company. (Equifax, Experian, TransUnion).

 

Beware: Credit Karma provides a score for free, but it is NOT your FICO score. It can sometimes be an indictor of your score, but often clients FICO scores are much lower than their Credit Karma score. While you are entitled to your credit report, sometimes a small fee is required to get a copy of your actual FICO score, which you can obtain from www.myfico.com. Many credit card companies have started offering their clients FICO scores for free each month. You can request copies of your free credit report here: 

https://www.annualcreditreport.com/index.action

 

TAKE-AWAY: Stay on top of your credit history and know your score.

 

MYTH: No credit is good credit.

FACT: Credit card use isn’t bad; Credit card abuse/misuse is. In order to build credit you need to use credit. Debit cards and pre-paid credit cards DO NOT affect or build your credit score. If you are unable to obtain credit cards but want to boost your credit, you can use a secured credit card instead. A secured credit card requires you to put up collateral to obtain the card, such as a car, boat, expensive jewelry, or an entire bank account. When you use the card responsibly, over time, your credit score increases, and then you can apply for a traditional unsecured credit card. Or you can see if you qualify for a credit card by using a co-signer.

 

TAKE-AWAY: Good credit is something that must be built and maintained.  Lack of credit can result in a low score, and viewed as poor credit in the eyes of a landlord.

 

MYTH:  The more money I make or save, the higher my credit score will be.

FACT: How much money you have in savings has NOTHING to do with FICO’s credit scoring equation. However, if your credit score is borderline some landlords will factor in high income or a large amount of liquid assets in the bank to your favor. If an apartment is not rent stabilized you may even be able to offer extra security or months of rent up front to help seal the deal.

 

TAKE-AWAY: It’s not what you make, but how you spend it.

 

MYTH: Carry a balance on your credit card; it helps your score.

FACT: NOT TRUE!

Each month you should pay your credit card bill ON TIME and in full. If you can’t afford to pay off the balance in full, then pay at least the minimum (preferably a little more than the minimum) on time. Never miss paying at least the minimum because missing a payment – even by a day – can cause major damage to your credit score.

If you’re carrying a low balance on your credit card and paying the minimum month-to-month you aren’t damaging your score nor are you improving it. But you are losing money each month in interest to your lender. Why throw away money?

 

TAKE-AWAY: Carrying a high balance from month-to-month can actually hurt your score because you look irresponsible to lenders. Pay your bills (at least the minimum) on time every month! 

 

MYTH: You share a credit score with your spouse.

FACT: Everyone has their own credit history and their own credit scores. There is NO such thing as a joint credit score. But if you open joint accounts (including credit cards, auto loans, or mortgages) with your spouse, you will share information on your reports and late payments by one person can affect the other person's score.

 

TAKE-AWAY: While there is no such thing as joint credit scores, joint accounts can affect your individual scores positively and/or negatively.   

 

MYTH: A poor credit score will haunt me forever!

FACT: A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. Past credit problems impact your scores less as time passes.

 

When lenders review applicants, they look at four elements of a credit report: identification, account history, public records (bankruptcy filings, court records of tax liens) and inquiries. Once a credit history is established, it is important to maintain a good record of on-time payments and conservative credit use. It may take some time for those just beginning to build credit to see an improvement. Additionally, their credit history will be evaluated periodically and, provided they are in good standing, their credit score will increase.

 

TAKE-AWAY: Improving your credit score IS possible and it’s never too late to start taking steps to raise your score.

 

 

MYTH BUSTER BREAKDOWN: How your FICO credit score works:

Payment history (35%)


Amounts owed (30%)


Length of credit history (15%)


New credit (10%)


Types of credit used (10%)


 

WHAT CAN I DO TO IMPROVE MY CREDIT????

 

Payment History Tips

Contributing 35% to a FICO Score calculation, this category has the greatest effect on improving your scores, but past problems like missed or late payments are not easily fixed.

Pay your bills on time.


Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO Scores.


If you have missed payments, get current and stay current.?

The longer you pay your bills on time after being late, the more your FICO Scores should increase. Older credit problems count for less, so poor credit performance won't haunt you forever. The impact of past credit problems on your FICO Scores fades as time passes and as recent good payment patterns show up on your credit report.


Be aware that paying off a collection account will not remove it from your credit report.?

        It will stay on your report for seven years.


If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.


This won't rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your FICO Scores.


 

Amounts Owed Tips

This category contributes 30% to a FICO Score's calculation and can be easier to clean up than payment history, but that requires financial discipline and understanding the tips below.


Keep balances low on credit cards and other "revolving credit".?

High outstanding debt can affect a credit score.


Pay off debt rather than moving it around.?

The most effective way to improve your credit scores in this area is by paying down your revolving (credit cards) debt. In fact, owing the same amount but having fewer open accounts may lower your scores.


Don't close unused credit cards as a short-term strategy to raise your scores.


If you close an account your available credit lowers, and that will affect your debt ratio in regards to available credit. This could LOWER your score!


Don't open a number of new credit cards that you don't need, just to increase your available credit.?

This approach could backfire and actually lower your credit scores.


 

Length of Credit History Tips

If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.?

New accounts will lower your average account age, which will have a larger effect on your scores if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.


 

New Credit Tips

Re-establish your credit history if you have had problems.?

Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.


Note that it's OK to request and check your own credit report.?

This won't affect a score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.


 

Types of Credit Use Tips

Apply for and open new credit accounts only as needed.?

Don't open accounts just to have a better credit mix – it probably won't raise your credit score.


Have credit cards – but manage them responsibly.?

In general, having credit cards and installment loans (and paying timely payments) will rebuild your credit scores. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.


Note that closing an account doesn't make it go away.?

A closed account will still show up on your credit report, and likely factored into your score.