Wed January 8, 2014
On-Time Payments Heal All Credit Report Wounds
Originally published on Wed January 8, 2014 1:16 pm
This is the time of year when many people make an effort to get a handle on their credit. But you might be confused about what actions can actually help your credit and those that can harm it. Consumer columnist Sheryl Harris joined Tell Me More host Michel Martin to share some tips and debunk consumer credit myths.
Tip: Understanding your credit report
- A credit report shows your credit and loan accounts, the balance owed on each account, and your payment history on each account.
- Collections accounts (unpaid past-due bills for even noncredit contracts, like cell phone bills) can also land on a report.
- All kinds of companies use credit reports to decide whether to do business with you, including property insurance companies, employers and landlords.
- A credit score is a grade based on the information in your credit report.
Tip: How to remove fraudulent information from your credit report
File a complaint with the Consumer Financial Protection Bureau. It will contact the credit report agency you're having difficulty with, and find out what the problem is.
Tip: Credit reports are free
You can get a free report by going to www.annualcreditreport.com, or calling 1-877-322-8228 (The Annual Credit Report Request Service).
Myth: Checking your credit report will lower your score
When you check your own credit report, or when a lender you've been working with checks your report, it's called a soft inquiry. Soft inquiries do not affect your score. When a lender checks your credit report in response to an application you've filled out for new credit, it's called a hard inquiry. Hard inquiries can lower your score if you have too many of them at one time.
Myth: You have one credit score that's constantly being updated
You don't have a single score, and the number doesn't constantly change. You only have a credit score when you or a company you do business with pays to run one for you. Your score isn't something you should worry about daily.
Myth: Closing a credit card account drags down your score
It's true that any change in your credit mix – adding an account or closing a paid-off account – will cause a dip in your score. But that's generally a temporary dip. One of the factors in a credit score is the amount of debt you have on your credit cards, versus the total limit on all your cards combined. If you have cards on which you owe large balances, you may want to keep cards with low-balance accounts open to lower your debt ratio and boost your score.
The best rule of thumb: If you have good credit, you can close accounts you no longer want --- as long as those accounts have been in good standing for a while and they've been paid off in full, and if you're not planning to apply for credit in the next six months. You don't want to fuss with your credit mix in that six-month period before you plan to apply for a home or car loan.
Myth: If you have bad credit or a bankruptcy, you'll never get credit again
People recover from bad credit all the time. You can get yourself out of a bad situation with time and on-time payments. An on-time payment means you're paying at least the minimum amount due (Ex: If the minimum payment is $25.00, and you only pay $23.00, that's not an on-time payment).
MICHEL MARTIN, HOST:
I'm Michel Martin and this is TELL ME MORE from NPR News. Coming up, you've probably heard of Common Core. Those are the new education standards that set baseline requirements for English and math. Well, some are concerned that these could actually widen the achievement gap between students who speak English well and those who are just learning. We'll hear more about that in just a few minutes.
But first, to matters of personal finance. Now this is the time of year when many people are making an effort to get a handle on their credit. But according to consumer columnist Sheryl Harris, there are a lot of myths out there when it comes to consumer credit, in particular, she says, many people are confused about the things that actually help your credit and the things that don't. So we've called her to ask her to help us sort it all out. She writes for the Plain Dealer in Cleveland, where in addition to dealing with financial issues, it is mighty cold. So she braved that to get to us. So thanks so much for joining us.
SHERYL HARRIS: Thank you, Michel.
MARTIN: It seems that there has been a lot of emphasis in recent years on helping Americans better understand their credit and putting a lot of emphasis on that. Why is that?
HARRIS: Credit's important to a lot of different aspects of your life. It used to be important only to you and your bank or you and your credit card company. But now there are lots of different companies that are using credit reports to make decisions about you.
MARTIN: What exactly is a credit report?
HARRIS: Your credit report basically shows how you handle credit card and loan accounts and how many of those accounts you have. If you make payments that are more than 30 days late, that will show up on a credit report. But for most of us, we're making on-time payments. And our credit reports will reflect that. The other...
MARTIN: And what's a credit score? Is that different than a credit report?
HARRIS: The score is a grade, and it's based on the information that's in your credit report. Scores can be all different. And you just need to be aware of that, that one score may not look like another score.
MARTIN: Well, that was one of the myths that you talked about first. You said, myth - you have one credit score that's constantly being updated. And you say, the fact is...
HARRIS: You don't have a single score. And it's not like you're walking down the street, and as you walk south, your number's changing up and down. You only have a credit score when you or a company that you do business with pays to run one for you. Your score is not something that you should be constantly worrying about on a day-in, day-out or even month-in, month-out basis.
MARTIN: Yeah, but you also say that you got to make sure your credit report is free of errors. And, you know, in the spirit of full disclosure, I have tell you that this is something that I have been dealing with off and on for months now, that these fraudulent reports keep popping up. And it's really a pain to deal with. So how do you deal with that?
HARRIS: You have fraudulent information on your credit report?
MARTIN: Yeah, and this is not a unique situation as I understand it. You know, from...
HARRIS: Right, there are credit reports - about 25 percent of them have errors. And about 5 percent of those contain errors that are serious enough to cause someone to have to pay more for credit. So if you've tried to get an error off your credit report and you are unable to do so, you should file a complaint with the Consumer Financial Protection Bureau. And that's consumerfinance.gov. And it will contact the credit reporting agency that you're having difficulty with and find out what the problem is. They're looking into this right now, and it's a huge issue for them. They've got your back.
MARTIN: OK. Well, good to know. Another myth you say is that closing a credit card account drags down your score. That's an interesting one. What is the truth?
HARRIS: It's true that any change in your credit mix - adding an account or closing a paid-off account - will cause a dip in your score. But that generally is only a temporary dip. One of the factors in a credit score is the amount of debt you have on your credit cards versus the total credit limit on all your cards combined. And if you're using up a lot of that space on your cards, you don't want to close a credit card account because you need that unused space to kind of change that ratio and make it look little better and help your score.
But the problem is there are a whole bunch of people who have great credit who pay off their cards every month, they've heard that closing an account will bring down their score and they're terrified to close old, unused accounts they don't want, accounts they're not happy with anymore. And they don't need to worry. This is the best rule of thumb. If you have good credit, you can close accounts that you no longer want as long as those accounts have been in good standing for a while and they are paid off in full and if you're not planning to apply for credit in the next six months. And the reason for that is you don't want to fuss with your credit mix in that six-month period before you plan to apply for, say, a home loan or car loan. You just want to look the same.
MARTIN: You say another myth is that checking your credit report will lower your score. True or false?
HARRIS: That's false. You can check your credit reports, and it won't make any difference to your score. When you check your own credit report or when a lender you already have an account with checks your credit report, it's called a soft inquiry.
And soft inquiries do not affect your score. When a lender checks your credit report in response to an application that you fill out for new credit, that's called a hard inquiry. And hard inquiries can lower your score if you have too many of them at one time. So to avoid too many hard inquiries, you want to comparison shop for loans like car loans in a really short period - like maybe two weeks - and you want to avoid kind of serially opening credit card accounts because those - credit card applications, the inquiries for those, those each count as a separate hard inquiry. And they'll bang your score.
MARTIN: This is - one thing I think would be of interest to a lot of people who've been through some difficult times in recent years. You say, myth, if you have bad credit or a bankruptcy, you'll never get credit again. Really?
HARRIS: People do recover from bad credit all the time. I mean, people go through bankruptcy to wipe out their credit. In fact, it used to be when credit was really easy to get, they'd come home from bankruptcy court and find a bunch of new credit applications in their mailboxes, right? So the fact is there is no situation that you can get yourself in that you can't get yourself out with time and on-time payments.
An on-time payment means you're paying at least the minimum amount due. So you can't - if your minimum payment on your card is $25, and you say, gee, all I can really pull together is 23 this month, that is not going to count as an on-time payment, no matter when it gets there.
MARTIN: So you say time and on-time payments...
HARRIS: That's right.
MARTIN: ...Heal all wounds.
HARRIS: They do.
MARTIN: Well, that's good, Sheryl. So thanks so much for that encouraging news. Is there one specific message that you would want to have people take with them?
HARRIS: I don't want them to be afraid to order credit their reports or to look at them. I think once they do, they'll feel a lot more empowered by that. So if they have a pen in hand, your credit reports are free if you go through annualcreditreport.com or if you call 1-877-322-8228. You can get a free credit report, and you want to make sure it is accurate, it has all your accounts on it, that you're getting credit for all the good credit that you have. And just take a chance. Go look at them. Once you do, you won't be afraid of that process anymore.
MARTIN: Sheryl Harris is a consumer columnist for the Plain Dealer in Cleveland. She joined us from a member station WCPN in Cleveland, braving the cold to get there. Sheryl, thank you so much for joining us.
HARRIS: You're welcome, Michel.
MARTIN: To learn more about Sheryl's tips, please go to our website, NPR.org/TELLMEMORE. Transcript provided by NPR, Copyright NPR.