Monthly Archives: March 2012

For a long time I have listened to friends, acquaintances and clients talk about credit reports and credit scores.  And after many years I have found that most people I have spoken to, have only a vague concept of what a credit report is and what a credit score actually means. They have heard rumors or read information on the internet that is just plain wrong or at best misleading. So to help, the following is a list of common misconceptions regarding credit reports and their scores.

1.      Every time someone checks my credit or runs an “inquiry” my credit score will drop by 5 points.  I have to admit that I have heard this one several times, and until recently I believed it to be true. However, as it turns out, there is no specific “magic” number that drops when an inquiry is made. While your score is affected, the actual affect is relatively minor. Keep in mind however, if you run around town and apply for several dozen credit cards or credit lines, then there will be several inquiries made, and the net result will be a much more significant drop in your score.

2.       My overall credit score is affected by where I reside.  Wrong. Plain and simple. Where you live has no bearing on your score. Only how you are handling your credit goes to determine your score. And certainly not how much money you make. Which brings me to the next misconception…..

3.      Making a higher income will result in a higher score.  Well, honestly, I don’t have to worry about this one. Unless my lottery numbers finally payoff, this one is not going to be a real concern to me. But, it causes me a little comfort to know that, at least in this circumstance, rich people live by the same rules that I do. We have all heard of the rich and famous filing for bankruptcy. And of course, the old addage “The more you make, the more you spend”  Utlimately, your score is affected by how you manage your debt, not how much income you make. Don’t believe me?.. just ask Nicholas Cage.

4.      Using a credit counseling agency will lower my credit score.  Wrong. The use of the credit counseling agency does not affect scores. However, in most circumstances, by the time you decide to use this type of service, you are already delinquent with your payments and your credit score is already damaged. And even if that is not the case, any payments that are less then the required minimum, and/or a negotiated balance less than what is owed, will affect your overall score. So using credit counseling, in and of itself, does not hurt your score, but remember, anything outside of being current on your regular payments will.

5.      Filing a bankruptcy will be on my credit report forever.  Wrong again. Bankruptcy filings are reported for 10 years. At which time they drop off your credit report for good. And while it is reported as a negative on your report, the actual impact of your score lessens with time. Generally speaking, it takes two years to rebuild your credit score, after a bankruptcy filing, to a respectable score. But, make sure you do it correctly. (See our previous blog “Bankruptcy; Fact vs. Fiction”)

6.      Doing a Short Sale of my home is better than a foreclosure.  Not really. Both options are reported negatively on your credit. And the impact on your score is about the same. However, with a Short Sale you may wish to speak to a tax attorney to find out what, if any, tax liability you may be stuck with on your following tax returns.

 7.      The “Perfect” Credit Score is 900….or 850…..or 800……. I have heard so many different numbers that indicate a perfect score that I am at a loss on this one. I think the key word here is “perfect”.  The highest FICO score that you can achieve is 850. But who cares?  If a bucket of chicken wings costs $15.00, who cares if I have a $20.00 bill? As long as I have the $15.00 then what’s the difference? No, I have not lost my mind, it’s just an example and I’m  running late for lunch and  KFC is sounding pretty good. Anyway…….if I am trying to purchase a home, and they require a minimum score of 720, then who cares if I have a score of 830? I still get the house right? Then in that case the “perfect” score for me and my situation is 720. See the connection with my chicken example?

I hope this helps when considering your credit report and it’s score. And by the way, it is important to review your credit report regularly for errors. You can get your report, for free, without signing up for some service that you don’t need at .  You can get one report, per agency, per year for free. Toggle between the agencies and you can get them more often.  I run one every 4 months just to keep up to date. I will run Experian, then 4 months later run Equifax, then 4 months later run TransUnion. Then I start all over again with Experian.

Allrighty then…I’m off to KFC and an extra large bucket of wings!!!!!

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Okay, your 20-year-old son just asked you to co-sign for his new truck. Without your signature the loan will be denied, he will be forced to take the bus to work, he will more than likely loose his job, and he will be forced to move back in with you thereby ruining any chance of your early retirement. Rats! 

Perhaps, your 19-year-old daughter in college has asked you to cosign on her student loan. Without the student loan she will not be able to complete college and get her degree in medicine. She will have to resign herself to waiting tables and serving hot wings while wearing bright orange short shorts!   Yikes!

Maybe, your best friend from work just asked you to cosign with him on a loan to purchase a “lunch truck”. “It’s guaranteed to bring in thousands of dollars a month”, he tells you. “You’ll get a percentage of the take. It’s a no brainer!”  Umm……….well……….

So then, what do you do? Before you sign off on someone else’s loan you must consider several factors. Your relationship with the person and the person’s history are very important when considering co-signing on any loan.

First of all, there seems to be a misconception of your liability as a co-signer.  Contrary to popular belief, you are not only half responsible for the debt. Many people have told me that since the debt is $10,000.00 they, as a co-signer, are only responsible for $5,000.00 if the other party defaults on the loan. NO! Understand that you are 100% responsible for the debt. If the other party defaults on the loan and skips town, you will be responsible for the entire amount. This will include harassing phone calls, lawsuits and garnishments of your income.

If your friend at work has a history of “get rich quick schemes” that seem to continually fall apart or if he always appears to be have financial problems, then regardless of how promising his current idea may be, you may not want to put yourself in jeopardy by co-signing on his loan.

If your flaky 20 year old son, that cannot seem to hold down a job, asks you to co-sign on his new truck, regardless of the sob story, regardless of the fact that he is your own progeny, you may want to really think about it before you put pen to paper and ruin your perfect credit score.

To add to the problem of judging the persons character before you sign, you must consider that even the most responsible person can hit hard times. Your nephew, that has held a steady job for over 10 years, could find himself unemployed. Your daughter in college, could graduate, but not be able to find a job to payback her debts. 

Even if the bill is paid, but the payment is late on occasion, this will affect your credit score. You heard right! Make no mistake, this debt is yours and is reported on your credit report. If several late payments are made, your owns credit cards may increase your interest rates! Your overall score could be lowered, thus preventing you from financing your own vehicle or house.  Even if they pay it on time, your debt ratio is affected. Adding more debt to your credit report, even if it was for someone else, can affect your score.

If you are being asked to cosign on a debt, consider the fact that there must be a reason. Perhaps the other party has terrible credit or does not have the income to support the debt. These would be huge red flags why NOT to co-sign on the debt.

Another issue with cosigning a debt is the issue of the potential damage it could do to your relationship. If the other party does default, regardless of whether or not it was their fault, it would put your relationship at risk. Even when it comes to your own children. But then, I guess, what would happen to the relationship if you didn’t sign. Something to consider I guess.

The concept of cosigning is such a bad idea that the president of consumer education for, John Ulzheimer,  has stated that financially “co-signing is probably the worst thing you can do.”

If, after careful consideration, you do decide to co-sign, make sure that you monitor the account. Make sure it is being paid. Make sure that the account is current and being taken care of. The worst thing that can happen is that you are notified by the lender, only when it is too late, that the account is seriously past due and they demand payment in full immediately.

So, consider everything carefully before you sign. That debt is yours and will affect you more than know.


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