The day I started to repair my credit, I read and heard it all. There were so many myths about credit and credit scores. It became very confusing. Let’s take a look and debunk some of the old and new myths out there that are just plain wrong.
Myth #1: Paying a collection will restart the 7-year reporting clock
Answer: A collection will remain on your credit report for 7 years and 180 days from the date of first delinquency. The date of first delinquency is the date you stopped making payments which caused the debt to go into a negative status.
For example, your credit card payment was due on March 5, 2015, but you didn’t pay. After 180 days of non-payment, the account was charged off. The date of first delinquency is therefore March 5, 2015. The 7-year (and 180 day) clock starts from there.
Making a payment does not restart this clock. The clock starts when the account becomes delinquent and does not restart whenever there is activity on the account.
In contrast, making a partial payment (including payment arrangements) will restart the Statute of Limitations (SOL). This time frame is determined by state laws. It is the allotted time a debt collector can sue you for the unpaid balance and outstanding fees. In fact, a payment, promise to pay, or even acknowledgement of the debt can restart the clock on the SOL. To see a list of states and their respective statute of limitations click here.
TIP: The worst thing you can do if you receive a summons from a debt collector is ignore it. Respond to the lawsuit by the date specified in the court papers, check the SOL, and show up! You may also want to consult with a consumer attorney in your area.
Myth #2: Never pay a collection agency
Answer: I don’t know how this myth got started, but it has gained traction. When someone mentions this in our Facebook community, I ask the same question. “If it’s true that you should never pay a collection agency, how are they allowed to sue you?” I’ve yet to get an answer.
In fact, some collection agencies can go as far as getting a judgment to garnish your wages, place a lien against your personal property, or freeze your bank account. Therefore, I strongly urge you to ignore this myth.
I agree that you should always request (in writing) that a collection agency validates the debt as yours. However, the worst thing you can do is buy into this myth. Just ask the many people that have been sued and suffered the financial consequences.
Myth #3: Once the debt is charged off, you no longer owe it
Answer: A charge off (aka write off) indicates that the anticipated income has been removed from the creditors accounts receivables. The charge off status is then reported to the three major credit reporting agencies to indicate that the account is no longer active.
The remaining unpaid balance is considered bad debt and may then be sold or assigned to a collection agency. Due to the fact that you signed a contract to repay the debt, you are still on the hook for paying the balance and possible collection fees.
In brief, a Charge Off is an accounting method to get bad debt off of the books after 180 days of non-payment. Just because the debt was charged off does not mean you no longer owe it.
Myth #4 Closing a credit card is guaranteed to lower your credit score
Answer: While closing a credit card may lower your score, it is not always true. Consider two of the five factors that impact your FICO score: length of credit history and utilization. The first, length of credit history is how long you’ve had credit. The older your credit history is, the better. The second factor – utilization, is how much credit you use compared to your credit limits.
If neither of these score factors are impacted, closing a credit card may not lower your score at all. Let’s say you decide to close a credit card that you’ve had for five months, and your overall utilization at that time was zero. However, you also have a credit card that is 10 years old. Closing the newer (5 month) credit card will not impact your length of credit history or your overall utilization. Therefore, there may be no score impact.
On the other hand, if it is your longest card and/or your utilization will rise significantly, closing it will lower your FICO score.
Myth #5 Showing utilization with a credit card will cost you interest
Answer: Showing utilization is not the same as carrying a balance. This is a misunderstanding. In fact, it is simply allowing your charges to post to your statement before it’s due. If you pay the balance before the next due date, you will not be charged interest.
Here’s an example: Let’s say you purchase gas for $20 using your credit card. Don’t pay it right away and allow it to post to your statement which also posts the $20 to your credit report. This is showing utilization. Paying it off before or on the next due date listed on the statement will avoid interest charges.
Myth #6: Making a partial payment will stop the account from going into collections
Answer: Making a partial payment does not satisfy your monthly obligation to the creditor. Therefore, the payment is considered late. After 30 days without a full payment, that late payment will be reported on your credit report causing your score to be negatively impacted. If you continue to make late payments, the account may be charged off especially if after 180 days the partial payments do not cover one full month’s payment.
Myth #7: You need debt to have good credit
Answer: There appears to be a misconception that in order to build credit, one must go into debt. Granted, there are some big-ticket items that are on our credit reports that cause us to have debt. These include mortgages, student loans, and auto loans.
However, if you are paying interest on a credit card, loan, or any other account for the sole purpose of building credit, pay it off immediately.
There are alternatives ways to build credit that won’t cost you interest.
For example, a credit card (secured or unsecured) can be used to show utilization and help you build credit. Remember, this is not the same as carrying a balance; therefore, it is not debt.
If you have no open or current installment loans, you can look into Self Lender. This won’t cost you interest payments. In fact, you will earn interest on your money and build credit at the same time.
Another option to avoid paying interest is to ask a close friend or family member to add you as an authorized user on their credit card. Just be certain it is someone who is responsible about keeping balances low and paying on time.
You can also report rent payments. There are several companies you can sign up with to do this. According to eRentPayment’s website, rent payments can be reported to the three major credit reporting agencies.
Finally, there is something called an alternative credit report in which you can pay a company to report your on-time payments for utilities & mobile phones. The company wouldl then give you the report to give to lenders who will accept it (mostly banks).
As you can see, credit and debt are not always synonymous. Therefore, you can build good credit without debt.
What You Can Do To Avoid Myths
For starters, ask questions. If you’re not currently a member of our Facebook community, feel free to join us. If you are already a part of our community, ask questions and search the group. Your answer is likely already there. In any event, be careful. Don’t be quick to make credit decisions without fact checking. As I explained, some of these myths can cause more harm than good.