Are you worried about going to credit counseling because you think it may impact your credit score? Did you hear that you can pay someone to wipe negative marks from your credit report so that you can have a clean slate? Or the one about someone who put all of their credit cards in the trash and their debt automatically disappeared forever? (Now that one isn’t a myth, but you get the idea.) Not everything you hear is true. There is some bad credit information out there that just won’t die. Fortunately, The Cheat Sheet is here to right some wrongs and clear up a few misconceptions about credit card management. Here are three credit myths and the correct answers to beliefs that are just plain wrong.
1. An inquiry will wreck your credit score
Note that there are two different types of inquiries — hard and soft. Hard inquiries are the ones that affect your score. This type of inquiry occurs as a result of a lender reviewing your credit after you apply for services such as a credit card or auto loan, according to myFICO, the consumer division of FICO, creator of the FICO credit score. Hard inquiries don’t have as much of a sting as you may think. Generally, you’ll only lose about 5 points.
A soft inquiry is any credit inquiry where your credit is not under review by a potential lender. So you don’t have to worry about checking your own credit, inquiries made by businesses who are thinking of offering you services (for example, credit card promotions), or inquiries made by business you already do business with, according to myFICO.
2. A potential employer can see your credit score
If a potential or current employer requests a credit check, they can only access your report, not your score. An employer will receive an amended version of your credit report, called an employment credit report, from all three major credit reporting agencies (Experian, TransUnion, and Equifax). If you are denied employment as a result of information in your report, the employer must give you a copy of the report in addition to a description of your consumer rights.
3. Credit counseling will lower your score
Consulting with a credit counselor will not reduce your score. The decision you make after meeting with one, however, will. A credit counselor will go over options with you, among them are debt settlement and debt repayment (known as a debt management program or DMP). If you can afford to pay off your debt in smaller chunks, entering a debt management program is usually the way to go.
“Going into a debt management program is benign to your credit scores. And, while the credit card issuer is being paid through the program they will report you to the credit bureaus as being ‘paid as agreed,’ which is also good for your credit scores. When you exit the program you do so without any credit card debt and solid credit scores, which has to be a great feeling,” said John Ulzheimer, president of consumer education at CreditSesame.com, on the website.
Debt settlement is a different issue; going this route will have a negative impact on your credit score. If you can avoid settling your debt, which means that you make an arrangement with a creditor where you pay less than the originally agreed upon amount, you should try.
“When you settle an account with a credit card issuer, it is updated on your credit reports as either a ‘partial payment plan’ or ‘settlement accepted by creditor.’ Both of those notations are considered negative by credit scoring systems and can lower your credit scores…,” said Ulzheimer on the Credit Sesame website.
However, Ulzheiemer says that in some cases, settlement may be a good idea.
“…If you have debts that have been sold to collection agencies, then settlements are a good idea. Most debt buyers and collection agencies acquire defaulted credit card debt for mere pennies on the dollar. If you’re willing to make a lump sum payment to settle the debt then you could get away with paying a small fraction of what you owed the original creditor,” said Ulzheimer.