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3 Common Misconceptions That Lower Credit Scores

credit cardsWith more scrutiny on your finances — whether you’re buying a home or refinancing one — you don’t want to make any needless mistakes to wreck your FICO credit score.

“You can make decisions that kill your credit score or ones that keep your score — or at least give you the ability to rebuild your score quickly later,” says credit expert Eddie Johansson, president of Credit Security Group. “Most people have incorrect or little information about how the system works, and that’s a big reason scores go down.”

Here are three misconceptions you can avoid:

Misconception 1: Paying late didn’t hurt my credit since I’m caught up now.

Johansson says recent late payments are the credit score killers he sees most often. “It’s great that you caught up,” he says, “but it doesn’t change the fact that you paid late. Anything other than ‘paid as agreed’ on accounts on your credit report hurts your score.”

Johansson emphasizes the importance of paying all your bills on time, every time. However, he says that if you must pay late and want to avoid damage to your score, pay the accounts that report to credit bureaus first. You can find this information by getting a copy of your credit report.

For example, credit reporting agencies say their records are updated “routinely,” but this does not mean instantly. It may take one to three weeks for your credit card company to report a payment or paid balance to the credit agencies, then more time for the agency’s reports to reflect the update. This is where your own credit report and the dates indicated can tell you which of your credit cards companies are more prompt in reporting and which ones may take a few more days.

Misconception 2: Dollar amounts matter in credit scores.

An example of bad credit score advice here is “pay the highest bill first,” Johansson says. “Dollar amounts don’t matter in FICO scoring; ratios and recency do. The effect on your score is the same for a $1 late payment as a $1,000 late payment. The fewer late payments on your credit report, the higher your score—regardless of their dollar amounts,” he explains.

Another way to increase your score is to have a high credit limit but low balance. It signals that you are credit worthy and have paid your bills. Call your credit card companies to increase the credit limit as high as possible but just don’t use the credit and pay down the balance so that it’s about half of the credit limit or lower.

Misconception 3: Closing credit card accounts helps your score.

If you cancel a card, you may have just thrown away your chance to increase your score by continuing to build on years of positive credit. “Very long term positive account history can really boost your score,” Johansson says. “It’s best for your score to keep cards open and active, using them for small purchases. Next best is to just keep them open so you can build your score back up quickly by using them later.”