Credit Facts and Fallacies

The following information was culled from an interview with Ricki Lowitz, a former fellow at the Urban Institute in Washington, D.C., and executive director of Working Credit, a nonprofit organization that offers credit-building education and counseling in seven states.

 

FALLACY: Medical collections don’t hurt your credit score as other collections do.

FACT: While this is changing with FICO 9, a new credit-scoring model, the most widely used credit scores continue to count medical collections against your score just like any other collection.

 

FALLACY:No credit score is better than a bad credit history.

FACT: Lack of a credit score is just as damaging as a bad credit score.

“If you have no score,” Lowitz said, “it’s like having a terrible score, because whenever you need to do something like borrow money you will pay the highest interest rates for everything.”

 

FALLACY: You need to pay a credit repair company to fix your credit.

FACT: You can take steps—like disputing an error—to improve your credit by yourself and for free, or you can get free assistance from nonprofits that specialize in helping people improve their credit.

 

FALLACY:You can’t have a decent credit score without paying off all your collections first.

FACT: Even if you have collections, you can achieve a good credit score within 6 to 12 months simply by establishing one or two lines of credit and managing them well.

 

FALLACY:It is better to pay off your collections before you try to establish a credit score.

FACT: “Even if you work like a fiend and pay off your collections,” Lowitz said, “you still won’t be in the game because you still won’t have a credit score.”

 

FALLACY: The only way to establish a credit score is with a credit card.

FACT:Another good way to build a good credit score is to obtain a credit-builder loan offered by a reputable company that keeps its interest rates low. These are secured loans. You take the loan, but don’t take the proceeds up front. The proceeds stay in a locked savings account or CD. While you will pay interest and perhaps a service fee, this loan is nonetheless a way to build credit. Once you pay off the loan, you get your money back.

 

FALLACY: The larger the loan you take out, the more your credit score increases.

FACT: “The effect of a $30 loan is the same as a $30,000 loan,” Lowitz said. “Whenever you pay back the debt on time, you get an ‘A’ on the test. All the credit-scoring system cares about is: ‘Did you pay back what you owe as you said you would?’”

 

FALLACY: It doesn’t matter if you miss a credit payment every once in a while.

FACT: “The most important thing about the credit system,” Lowitz warned, “is that if you are 30 days late on a credit card or loan payment—even once—that can lower your score by 100 to 125 points.”

 

FALLACY: Payday loans, auto-title loans, and leases from rent-to-own stores, if managed well, can help you build a credit score.

FACT: These types of products typically are not reported to mainstream consumer credit bureaus—unless you fail to pay them.

 

FALLACY: Poor people pay more for everything.

FACT: Actually, according to Lowitz, bad credit—or no credit—is what drives up low-income people’s costs, because those factors force them to pay absurdly high interest rates.

 

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