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Debunking credit myths: What helps or hurts credit ratings

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SALT LAKE CITY — Credit counselors say there are some pretty big misconceptions about what will help or hurt someone's credit rating. They say many people underestimate just how damaging certain infractions are.

A lot of people think all late payments damage their score exactly the same. While credit-card companies will raise your interest rates and bump up your monthly minimums if you miss a payment by a day or two, the real damage comes when the payment is 30 days past due. Lorin Hanks with Aggressive Credit Repair says even if you've been paying your bills perfectly for 30 years, once you have a 30-day late payment, your score takes a major hit.

"The second that late payment is 30 days late and it goes on your report, an 800 score can drop 100 points in one night because of one late payment," he said.

A late payment this year is not as bad as a bankruptcy last year, though.

"The most significant impact an infraction has on the score, be it a collection or a judgment, no matter what it is, is how recent it was. The more recent the infraction, the harder it is on the score," Hanks said.

Yes, a bankruptcy does more damage than a late payment, but Hanks says time is what really heals credit wounds. The more distance between an infraction and the present, the better.

There is some disagreement about whether you should completely pay off your balance every month, or if you should have a very small balance left over. Hanks says credit companies base their scores on their potential to make money from you. He says leaving a small balance works well to build a credit score.

But other credit analysts, like American Credit Foundation spokesman Mike Peterson, disagree. Peterson says he doesn't believe you need to have a small balance to build your score. But, they both agree that if you have a zero balance on your credit card because you're not using it, then that's a bad thing.

Many treat credit as if it's tied to their salary.

Peterson says a lot of people make this mistake. "We see that quite a bit. People think, 'I just got a raise, so my credit score should increase.' But it has nothing to do with that," he explained.

Some think losing an account will increase a score. Peterson says this was true a few years ago. But it can have a negative effect now, especially if your other lines of credit are maxed out.

"If you close an account, you just reduced your credit usage ratio, and reducing that by any kind of significant number is going to pull your credit score down," he said.

e-mail: pnelson@desnews.com