Take Charge America exposes Top 10 credit myths

PHOENIX—How hard it is to erase debt collections from your credit report? What happens to your credit after you tie the knot? These are just a couple of credit questions that are often answered incorrectly.

Mike Sullivan, director of education for Take Charge America, a non-profit credit counseling company, says the credit system is complex, and that’s why it is important to turn to an expert for help.

“If you have questions about your credit, see a credit counselor or financial planner for the most accurate answers,” he said. “We all have varying levels of financial security. What’s best for your sister or co-worker, may not be the best solution for you.”

So, how do you wade through the onslaught of misinformation? First, Sullivan says many consumers confuse the functions of their credit score and their credit report.

“Your credit score is a three-digit number that summarizes your credit report,” he said. “An 800 means life is good, 400 means you won’t be buying a car this year.”

To help sort the confusion, Sullivan laid out the following top 10 myths about credit:

Myth 1: Settling your debt will remove it from your credit report. Unfortunately, it’s not that easy. Late payments and collections generally stay on your credit report for seven years, and they can still affect your credit score. However, if you have paid the debt in full, that will be noted on the report.

Myth 2: Too much debt? Just file for bankruptcy to erase it. New bankruptcy laws passed last fall make it harder to file for Chapter 7, which completely erases debt. This is forcing more people to file for Chapter 13, which requires a five-year repayment plan. All debtors are also required to complete credit counseling prior to filing. Moreover, bankruptcy remains on your credit report for 10 years.

Myth 3: Canceling your credit cards will improve your credit score. If you have $50,000 in available credit and owe $10,000, then you owe 20 percent of your available credit. If you close an account with a $30,000 credit limit, you will then owe the same $10,000, but it will be 50 percent of your available credit. That lowers your credit score.

Myth 4: Your credit score is the same at all three credit bureaus. Lenders are not required to report to all three of the major credit bureaus, Equifax, Experian and Trans Union. Each agency may have different information on your report, and therefore, a different score.

Myth 5: Continually checking your credit report will lower your score. You can check your report from the three credit bureaus as many times as you want, and it will not affect your credit score. To obtain a credit report, visit www.annualcreditreport.com.

Myth 6: Your salary helps determine your credit score. Your credit score is based on the amount of credit and debt you have, not how much money you make. If you receive a raise, and your credit and debt remain the same, your credit score will not improve.

Myth 7: Shopping around for a loan can damage your credit score. While inquiries do show up on your credit report, they do not necessarily damage your score. If the same types of inquiries are made within 14 days of each other, they only count as one inquiry on your credit report. Keep in mind that this applies to loans, not credit cards.

Myth 8: Using cash for everything helps increase your credit score. Your credit score is determined by the amount of credit you use, not cash. A steady, responsible use of credit is the best way to build your credit score.

Myth 9: Tying the knot means tying credit scores. Credit scores, for better or worse, remain separate after you are married. If you open a joint account, the credit information will show up on both reports.

Myth 10: If you co-sign on a loan, you don’t owe anything on delinquent accounts if you didn’t make the purchases. If the primary loan recipient is not able to pay, the co-signer is responsible for the debts, whether that person made any purchases or not.

About Take Charge America

Founded in 1987, Take Charge America, Inc. (TCA) is a non-profit 501(c)(3) organization headquartered in Phoenix. TCA offers a variety of services, including financial education, credit counseling and debt management. TCA’s programs are utilized by tens of thousands of families and individuals each year. To learn more about TCA or its programs call 1-800-823-7396 or visit www.takechargeamerica.org.

From the May 17-23, 2006, issue

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