Bad Credit Myths - Follow the Wrong 'Credit Repair' Advice and You May Damage Your Credit Score

Years ago, one "financial guru" advised everyone with bad credit to "cut up" their credit cards. Several legitimate financial experts said time and time again that this was not a good idea, but the talk-show pundit - let's call her "Sue Zorman" (name has been changed to protect the guilty) - persisted in dispensing this bad advice. Finally, in the face of irrefutable evidence, Sue Zorman had to admit that she was wrong, that it was not a good idea to cut up your credit cards because closed accounts look bad on your credit report. What's more, people with bad credit who close accounts in good standing face the risk of being unable to open new ones - which puts them in danger of falling victim to payday lenders and pawnbrokers. But while Sue Zorman may have corrected herself on this matter, a thousand even less-qualified wannabe gurus have taken her place on the internet, offering equally bad advice that could actually hurt your credit instead of helping it.

Bad Credit Myth #1 - Closed Accounts are Good

This is essentially Sue Zorman's false prophecy, still repeated on the internet. Take a look at this "tip" pulled from the web:

Reduce the number of credit cards you carry. Write to your creditors to request that they close your accounts and report this status change to all three credit-reporting agencies.

Closed accounts tell creditors that you are facing financial difficulty. What's more, your FICO score is positively impacted by the number of open, active accounts "in good standing" that you have, and unused but available credit is also very favorable to your credit score. In other words - this "tip" is just plain dumb.

Bad Credit Myth #2 - Lowering Your Credit Limits is Wise

Debt Relief USA's goal is to be your #1 personal finance resource, and when we come across hurtful misinformation like the "tip" listed below, it reminds us how vital our mission is.

Request in writing that your creditors reduce the credit limits on your accounts to lower your amount of available credit. The total amount of available credit is considered by lenders even if you owe nothing.

At this point we think it's important to stress that these are real "tips" found on the web, because the above is just about the worst thing you could possibly do. The first part of the second statement is true - "the total amount of available credit is considered by lenders" - but the fact is that the more available, unused credit you have, the better! Closing your accounts or asking that your credit limits be reduced will result in a lower percentage of unused credit, which will have an immediate, dramatic, and entirely negative impact on your credit score.

Bad Credit Myth #3 - Secured and Co-Signed Are Just as Good

Another popular myth is that secured credit cards and co-signed loans help your credit score. While each can be helpful, they do not always even appear on your credit report, and if they do, they usually are not as beneficial as unsecured credit cards or loans without a co-signer. Creditors and credit reporting agencies are a lot of things, but they are not stupid. Secured credit cards - which are credit cards that you deposit money into before you can use - don't even utilize credit. Why should they improve your credit? The only way that they can is if the card issuer reports your account to the credit bureaus as an unsecured card, so if you want to use a secured card as a credit-building strategy, be sure that your card issuer does so. Co-signed loans vary from case to case. The three credit bureaus each have different criteria when it comes to co-signed loans, but to put it simply, sometimes they don't even include them on your credit report at all, and even if they do, they don't count as heavily as loans without a co-signer. The reasoning is simple - you are much less likely to default on a co-signed loan, so prompt payment does not as accurately reflect your credit-worthiness.

Always Consider the Source

Before acting on a "tip" to improve your credit score, take a moment and consider the source of your information. After all, some actions that you might think would improve your credit score could actually do you harm. Debt Relief USA's goal is to be your one-stop resource for consumer credit and personal finance information on the web, and our articles are written by accredited financial professionals. With so much misinformation available on the web, it pays to begin your credit-repair journey here.