14 Things You Need to Know About Your Credit

The truth is... lenders are looking harder than ever at credit. Use these tips to help your score!

1. Will paying off collection accounts, charge-offs, or liens help my credit scores?
Paying a past due balance on a charged-off / collection account typically will not, in most cases, increase your credit score. I do not suggest paying these types of accounts when you are planning on applying for a loan in the next six months since they can hurt your score by paying them. Please let me clarify that I am not suggesting that you not pay a collection account, but that you consider waiting until the loan closing or shortly after to pay them since it can reduce your score and hurt your chances of getting loan approval. I suggest that you either pay or settle these accounts either concurrent with the loan closing or directly after since not paying it can lead to either a lawsuit being filed or the debt being sold to several collection agencies in the future, which will damage your credit even more in the long run.

If you are determined to pay them off - I recommend you contact them direct, ask them to provide you with written proof that you owe the debt. Once you are satisfied that this is your debt you would want to ask them to send you a statement in writing showing (a) the total amount due and (b) verbiage that states that they will delete the account from credit report once the balance is paid. If the account is updated as paid but not deleted from your credit report - chances are that your credit scores will go down. That is why I strongly suggest the verbiage stating that they will remove it from your credit report.

If you do not agree with the information reported on these accounts I suggest that you dispute them in writing with the credit bureau and the source of the negative reporting.

2. I pay my credit card balances off in full every month. Does that guarantee higher credit scores?
This is a common misconception and if your credit card balance is high on the day of the month that your credit card company reports to the credit bureaus that will be the amount reported. The fact that the balance is paid off with each month's billing statement and returned to "zero" might not be reflected on your credit report. Many self-employed or small business people, or those who make many business-or profession-related purchases on their credit cards and then pay of the balances each month, fit this profile.

Say for instance, that by the end of the month, you make $7,000 worth of purchase using a credit card with a credit limit of $8,000. In the middle of the month, at the time of the due date, you pay off the entire balance that appeared on your last statement.

But from a credit reporting perspective, you aren't paying off the entire balance: by the time your payment arrives at the credit card company, your true balance has changed due to the incoming charges. While you may pay the full amount shown on your statement, the account never reaches a true zero balance, unless you cease charging for a month. Since the credit card companies choose a particular day of each month to report to the bureaus, whatever the balance on that day is the one that goes on your credit report. Your credit score may remain unchanged if your purchases are consistent month to month, or the score may drop if the balance is higher, or rise if the balance is lower.

So, if you know the date that your credit card company reports to the bureaus and you want to raise your credit score at least temporarily, then paying off your balance a few days before that date could achieve that goal. This is a prime example of how someone who in reality handles their credit very responsibly is in fact penalized by the credit scoring system, in part because of the timing or reporting cycles and the current inability of the credit scoring system to accommodate people who regularly payoff high balances, or at lease dramatically reduce them.

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