Three Misunderstood Facts about Credit

. Paying off your credit cards every month does not affect your credit
score.

o While paying your bills on time is an important scoring factor, another
important factor is in play with credit cards: the proportion of balance to the
credit limit. If you pay off your cards in full every month, that does not mean
that the balance used to calculate your credit score is zero. The balance
used to calculate your score is the balance reported on your statement before
you pay it. If you really need the highest score, pay your card down before
the statement is generated.

. Divorce does not affect your credit score

o It’s not the divorce that causes scores to plummet. It’s the fact that the
person responsible for paying the bill is not necessarily the person whose
credit is affected by it. For example, if spouse A is awarded the house and
pays the payment late, anyone on that mortgage is affected, despite whom
the court says is responsible for the payment. Authorized user accounts can
count for or against you despite the fact that you may not be responsible for
the debt on them. The best strategy is to clean all those things up by getting
new loans, transferring credit card balances and cancelling authorized user
accounts.

. Paying collections can hurt your credit score

o This is a strange quirk in the credit scoring system. Collection accounts
are not scored by whether or not they are paid. They are scored by the date
of last activity. Therefore, paying them off has no impact on your credit
score unless the collection agency updates the date of activity, which actually
makes your credit score go down! I recommend that people call the agency
and try to negotiate for the collection agency to delete the account entirely in
exchange for payment. This way it is gone for good.

The number one thing you can to for your credit is to take responsibility for
it. That means learn everything you can about it and do whatever you can
within your control to increase the positive and decrease the negative. If you
don’t know how credit scoring works, you are immediately disadvantaged.
“Wesley”, a new client, walked into my office several years ago. He was,
among other things, an author who had written and published a fiction novel
about nuclear Armageddon.

Wesley desperately wanted to purchase a home for himself and his wife, but
his credit was ravaged. I agreed to help him. He promised to follow my
instructions, and we began a series of actions aimed at raising his credit
scores.

Wesley had a long list of credit mishaps, and like so many people in this
circumstance he had a story for each derogatory piece of information on his
credit report. These stories of his were lengthy and detailed, and they all
shared a common thread: nothing was his fault.
Nevertheless, I agreed to help Wesley and we began the process. It took five
months and a fair amount of work to get his score high enough to qualify for
a mortgage loan.

Wesley was so pleased with the results that he presented me with a signed
copy of his book. He had written some clever remarks inside the front cover,
praising me for the work I had done on his behalf, and a presumably sincere
thank you for all of my help.

We then went to work on the nuts and bolts of buying a home. I coached him
on the process, a general timeline, what I needed from him now, and what to
expect next.

Wesley began his search for a new home. He soon found one and finalized a
purchase contract, and we began the process of putting a loan together. We
were about halfway through the loan process when Wesley called me out of
the blue to inform me that, per his wife’s wishes, they were going to use
another lender. I had never met his wife.

I suppose that I shouldn’t have been surprised, but I was taken off guard. He
apologized, saying there was nothing he could do about it, and that he had
no say in the matter. Wesley’s story did not ring true to me, but I wished him
well and released his loan documents back to him.

Five years later, Wesley strolled into my office unannounced. I shook his
hand and invited him to have a seat, curious to know how he was doing and
what he had been up to. As it turned out, the other lender had, for unknown
reasons, failed to get their mortgage loan done. He told me that his credit
had once again taken a turn for the worse, and had sunk back to the level
where it had been when I first met him. Wesley had fallen on hard times.
He told me he had written a screenplay and was negotiating with movie
executives for a multi-million dollar movie deal. He asked me if he could
borrow sixty dollars, promising to pay me back within a week. He said he
hated to ask me, given the circumstances of our last encounter, but didn’t
know where else to turn.

I wrote him a check. He asked me if I wanted him to sign a contract. I told
him that I was fine with a handshake agreement. After all, a contract for
sixty dollars is pretty useless if someone doesn’t feel any obligation to keep
his promises, so I just took my chances, slim as they were. I thought of it as
a good will gesture. Wesley thanked me and walked out. I never saw him
again.

Sadly, Wesley’s story is all too predictable. It illustrates, in a nutshell, the
problems inherent when people rely on others to do work for them. They
take things for granted, they don’t learn anything, and in the end nothing
changes. You can mend someone’s credit score, but you cannot transform
the person. That is something they must do themselves.