While reading a major financial paper, I saw an ad from a big time brokerage. The ad was giving seemingly common advice in personal credit repair: on time bill payment increases your credit score.
If only it were really that simple. The fact of the matter is you could pay all of your bills on time for the rest of your life and never even have a credit score. You may be thinking I fell off my rocker with that one, but the truth is that if the entity you are paying does not report to Equifax, Experian, or TransUnion it will not be reflected on your credit report. No information to create a credit report results in no credit score, rendering you a consumer ghost.
Another truism is that you can make timely monthly payments and end up hurting your credit score. That occurs if you have a high utilization rate, which is the amount owed on an account compared to the credit limit.
While your monthly utility bills or the bill owed to another creditor may not be reported to one of the three credit bureaus, that bill can land on your credit report if it goes to collections. This is the only way that timely bill payment can help your credit score, but it does so only because you are not creating a negative account. A collection account will decrease your credit score by 60 or more points. About 23% of those with a credit score have an account in collections, and a collection account will render you a resurrected ghost if you were off the grid before that account was reported.
Sometimes, an account does not go into collections for a year or more after it is delinquent. The collection agencies report the accounts to gain leverage on you, and a common practice is to report a date that results in the account being reported for longer than is allowed. Federal law provides for what is called a date of delinquency, which starts the seven year period that a collection account can be reported. To learn how to determine when that clock starts, read the Debt Management chapter in Winning the Credit Score. Collection accounts comprise the largest category of complaints about credit score errors.
Way too many people rely upon half-truths or myths that surround how to build a credit score or to repair credit. It is both simpler and more complicated than is often believed. I don't know about you, but when I took Economics in high school, I learned how the American financial system worked, but I learned nothing about how to build a credit score or repair my credit.
Understanding the dynamics of how the credit system works was easier than I thought once I had all the facts in hand. Once I took the time to get that knowledge, I felt empowered and took control of my financial life. Credit score building is easily achieved once you dispel yourself of the half-truths and myths about it. Another fact is that with discipline to a plan that fits your budget, you will eventually earn a 760+ score. You are the only determining factor in whether that is a myth or the truth.
