Improve Credit Rating – Dispelling 5 Myths

Jed C. Jones Ph.D. asked:

There are a lot of myths floating around about how to improve your credit rating. Truth is, a better credit rating can save you $1,000s in annual debt payments.

Here I dispel 5 myths about improving your credit rating:

Myth #1: I do not stand to gain much financially by improving my credit score

The Truth: Even a 50-point improvement in your credit score can save you $1,000s in annual debt payments. Reason: a better credit score means you are eligible for lower interest rates on your loans and credit card debt, and lower rates can literally save you hundreds of dollars each month.

Myth #2: I should close as many credit cards as possible

The Truth: Actually, closing out your credit cards can actually backfire and worsen your credit score. This is because 30% of your FICO score factors in the amount you owe versus the total amount of credit extended to you. By closing cards, you hurt this part of your score. Pay down cards: yes, but close them: no.

Myth #3: I should reduce the types of debt I have to as few as possible

The Truth: About 10% of your credit score is based upon the diversity of debt instruments you have. Translation: it is better to have a few bank cards, a few credit cards, a few department store cars, and maybe an auto loan or a mortgage. Do not run out and close your department store credit cards, for example. Just pay down the high-interest cards and then put them away in a shoebox in your closet but leave the accounts open.

Myth #4: It is too late to fix errors and late payment issues from the past

The Truth: In reality, you can and should try to fix errors on your report and to reconcile late payments, even if those items occurred months or years ago. If you can prove that the errors you found are indeed errors, the Big Three agencies will remove them from your report immediately. Regarding late payments from the past, you can usually offer to make those payments even if it is now months or years since they were due. In exchange, ask the institution in question to remove the corresponding glitch from your report. Since 35% of your score is based upon your payment history, this can really boost your score.

Myth #5: I should not apply for more credit cards

The Truth: Actually, increasing the total credit amount extended to you can actually improve your score. This is even true for high-interest cards; just be sure not to actually use them after you receive them! And, watch out for cards with annual fees before you apply.

There are many myths floating around about how to improve your credit score. By educating yourself, you stand to significantly improve your credit rating.

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