Surprise, Your Credit Report Stinks

Credit reports are a funny thing that even the most seasoned of financial experts have trouble understanding. With all of the “myths” and “misconceptions” about credit scores swirling around it can be difficult to decipher myth from the real truth.

Recently my friend went to a car dealership in search of a new vehicle to replace their old vehicle. Unfortunately, they didn’t have the money saved up to purchase the vehicle (I advised paying cash makes the most financial senseJ), and were going to have to finance the vehicle.

When applying for any loan or line of credit you are subjected to a credit pull to determine your credit worthiness. After the credit pull was complete and the score was in plain sight my friend was shocked to find their score was much lower than they expected. Not only was this car loan going to cost them more but their “lower” score was going to affect their insurance payments and maybe even their chances for employment.

They had many questions for me as they had fallen victim to believing the many myths about credit and had no idea they were causing the damage they did through actions they thought were innocent.

So let’s debunk some of these myths to clear up a few of the misconceptions about credit scores so you can get your credit score in tip top shape.

Myth vs. Reality

The BBB recently published a video by the NFCC, The Many Urban Myths About Money and Credit where some of the most common myths about credit reports are debunked.

Here are the top 5 myths:

1. “Bankruptcy Wipes the Slate Clean, Leaving me Debt Free”

2. “As Long as I’m paying something toward my debt, I’ll remain in good standing”

3. “I don’t have any credit problems. so there is no reason for me to check my credit report”

4. “When cosigning a loan, I am not responsible for the debt”

5. “The credit card companies know what I can handle”

My friend had actually believed 2 of these 5 myths; myths 3 and 4. They admitted to not having checked their credit for at least 2 years. There is no reason not to check your credit at least once a year, it’s free!

They had also gone through a divorce about 2 years ago and unfortunately had no idea the accounts they were cosigners for were affecting their credit. Their ex had let the accounts go delinquent causing a major drop in their score as they were equally responsible for the debt.

Many of us actually believe these myths and hurt ourselves by not understanding how credit scores really work.

5 More Myths for Thought

1. The amount of money I make affects my credit score. Debunk: While your income may be a factor in being approved for a loan, your income is not considered as a factor in your score. When computing your credit score, credit bureaus only look at things such as your payment history and how much debt you owe; personal information like your gender, age, and location can’t legally be considered.

2. Checking your credit will lower your score. Debunk: The Fair Credit Reporting Act, entitles you to one copy of your credit report a year from each of the three major credit bureaus. You can check once a month or more if you want (it’s not necessary) and it won’t adversely affect your score.

3. When you get married so does your credit. Debunk: Marriage does not mean married credit scores, each of you has your own profile. However, your spouse’s credit habits can affect your credit score, specifically activities like paying bills on time.

4. If you co-sign on a loan, your credit score is not affected. Debunk: When you co-sign for a loan, you are equally liable (along with the primary borrower) to repay it. This debt will appear on your credit report and will have the same ramifications as if it were your name alone. The bottom line is know who you are co-signing with. If the other person pays late, that late payment will show up on your credit profile as well.

5. If you don’t use it you lose it, your credit that is. Debunk: Your credit score is based on active accounts, but that doesn’t mean inactive accounts that are still open just disappear. Those accounts are still part of your “available” credit.

My friend got their “crash course” in credit report myths vs. truths after their disheartening experience at the car dealership. Knowledge is power, so get to know your credit report!

Have you ever been blindsided by your credit report?

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About Suzanne Cramer

11 Responses to “Surprise, Your Credit Report Stinks”

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  1. My favorite myth:

    5. “The credit card companies know what I can handle”

    Thank you credit card companies for having the faith that I could handle $100,000+ in credit. Sorry I let you down miserably.

    • Suzanne says:

      You are a riot! Myth 5 is my favorite to… Credit card companies let us think we can handle extensive credit limits–knowing eventually we will get ourselves in trouble. Why else would they continue to increase our credit limits?

      • Great article Suzanne… I used to see the amount of credit available to me like a badge of honor. I would smirk every time I logged into my AMEX account and see “No Pre-Set Spending Limit”. One day I realize I’d been allowed to spend $40,000 and I’m screwed when they suddenly ask for a large chunk of it back. There’s no honor to be found in credit.

  2. Brad Chaffee says:

    Great post Suzanne but I’m sure you know my opinion on credit scores. :D

    I do check my credit report for fraud and mistakes each year but I could care less what my score is since I no longer borrow money. Saying that to people causes their jaw to drop so I’m pretty used to having someone chuckle or try to explain to me why I’m wrong. It’s actually quite amusing. LOL

    My auto insurance hasn’t skyrocketed either in fact it has only gone down but I wonder if it is mainly a problem when people are in the market for a new plan (or their first insurance policy) that it effects them. As for the jobs thing I know it affects military personal especially with regard to security clearances but still don’t understand why that is.

    All I know is that for us, playing the credit score game caused us to do some pretty stupid stuff in the past in an effort to improve our score somehow. We stopped making financial decisions based on whether or not our score would improve or worsen. We simply stopped caring and contrary to popular belief it has not affected us one bit.

    People sometimes say well what if you go to rent an apartment? Right now we rent a townhouse from my in-laws but if and when we decide to move I’ll be sure to have a copy of my emergency fund statement as a source of proving my financial responsibility. Any landlord that would base it on a score rather than real life evidence would be a fool.

    I think if you have to have debt to somehow prove your financial worthiness then I’d just rather not be a part of it. LOL

    I do completely understand that my beliefs are not popular but that’s what tells me we are doing the right thing. Popular is broke. :)

    I dream of a credit score revolution where everyone refuses to take part but that would mean everyone would reject debt too which I know will never happen. LOL Still a guy can dream right? :D

    • Suzanne says:

      While your belief about credit scores may not be popular it is working for you and well lets face it if the rest of us could get on board we probably wouldn’t have debt. I have no idea why it is fair for insurance companies and places of employment to consider credit scores in their decision making process; it just doesn’t seem like a good predictor of anything–especially when there are cash only guys like yourself out there.

  3. I hear from people all the time who are afraid to get help with debt for fear that it will ruin their “perfect credit”. They don’t realize 2 things – first, if you have so much debt you need help then you don’t have perfect credit in the first place. They are only thinking of things like late payments, but high debt and maxed out cards also hurts it. Second, why do you care about credit if you are drowning in debt? So many people think of their credit score like an award, not something functional. Guess the credit score companies needs to make money too.

    • Suzanne says:

      I agree with you completely. I talk to people everyday who are drowning in debt, making late payments, etc and worried getting help with their debt through a debt relief provider will hurt their credit score; they don’t realize by continuing down the path they are on they are damaging their credit.

  4. I liked the video link…thanks! Anyone know if you freeze your credit reports, if there is any need to check them or do you have to ‘thaw’ them out to check?

  5. Suzanne says:

    Here is a great article on credit freeze in’s and out’s. Should you freeze your credit report? by Liz Pulliam Weston

    http://articles.moneycentral.msn.com/Banking/FinancialPrivacy/ShouldYouFreezeYourCreditReport.aspx

  6. I’m with Brad, I could care less about my credit score because I don’t borrow money anymore. We’re debt free except for the mortgage. He’s right, people just look at you funny when you tell them they don’t need a credit score.

    My latest post is about this particular subject. It’s about “Marge”, a friend of mine’s mom who tried to apply for a store card after being debt free since 1966. Her score wasn’t just low, she didn’t even exist in the system. Why she wanted the card I don’t know, but how she handled it makes for a good story.

  7. Tyler S. says:

    My credit history isn’t exactly extensive, but it’s slightly above average since I’ve always paid on time when necessary. What’s killing me is my student loans, but that’s just another bill to pay on time and see it shrink over time.

    I did learn some things here I was not aware of before, such as your income not affecting your credit score. It doesn’t matter as long as you pay the bills! This is great news to me as I try to raise my scores and lower my debt!

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