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Busting the myths when it comes to credit<br> Tax liens, even when paid, can linger on your credit report for years

When it comes to building a better credit score, you'll never get ahead if you make your money moves based on myths.

And credit scores continue to be confusing -- even though more information is out there to help consumers.

Most consumers, for example, do not know how much extra money a bad credit score can take out of their pockets when they use a credit card or take out a car loan.

Take a $20,000, 60-month car loan. Most consumers -- about 70 percent -- don't realize that a borrower with a bad credit score could pay about $5,000 more in interest than someone with a good score, according to a survey by the Consumer Federation of America and VantageScore Solutions.

"They did not understand the financial cost of a low score," said Stephen Brobeck, executive director of the Consumer Federation of America, an association of nonprofit consumer organizations.

Consumer credit scores sank to new lows after the recession. FICO disclosed that 25.5 percent of consumers -- nearly 43.4 million people -- had a credit score of 599 or below, which means they're deemed poor risks and either won't get loans or will pay very dearly for credit cards, car loans or mortgages.

Consumers need to understand that they can actually save money -- even if their score isn't all that hot -- by shopping around for a car loan.

"The biggest myth is if you comparison-shop, it will destroy your credit scores. It will not," Brobeck said.

Another point of confusion: A credit score of around 700 or higher might not be all that great. What's considered a strong credit score is going to depend on the type of scale that's used.

Is the range from 300 to 800? Or is the highest score on the scale more than 900?

Brobeck said consumers should understand that 650 or 700 isn't necessarily a good score now. Lenders also draw different lines for the best rates.

Let's look at other myths:

*Myth No. 1: Keep the balances on your credit card at 50 percent or less of the available lines of credit.

Truth: You'd want to use no more than 10 percent of your available credit for an ideal ratio. So if you have $10,000 of available credit on a credit card, you'd want to use no more than $1,000 to earn the highest possible credit score.

Paying off a balance won't hurt your credit score.

But you don't want to charge a $5,000 income tax payment on a credit card if you won't pay it off soon and want to shop for a car loan or refinance a mortgage in the coming months.

"Avoid any major purchases on your credit card if you're about to apply for an important loan," said Gerri Detweiler, personal finance expert for

*Myth No. 2: Paying cash is the only way to go to build a good credit score.

Truth: You're actually better off keeping two or three credit cards open. It could be a major credit card and a credit card from a department store or other favorite store.

If you don't have credit records, you might not even have a credit score.

You do not have to use all your cards all the time.

"It's not that you have to go and shop at the Banana Republic every single month," Detweiler said.

The amount of available credit you have doesn't hurt your credit score. Instead, it's the amount of debt you carry in relation to that available credit -- and how well you pay your bills on time that matters more to lenders.

"What they're more interested in is how you're using that credit," Detweiler said.

Even an installment loan -- say, a zero-percent car loan that you might pay off early -- can help build a better score.

*Myth No. 3: Finally paying off a big debt -- like back taxes owed for years -- will automatically boost your credit score.

Truth: It's not that simple.

Tax liens, for example, can be way worse on a credit report than many people realize -- and still hurt your score even after you've paid off the debt.

That's because the lien shows up on your report when the Internal Revenue Service files notice of a lien. The tax lien can remain an additional seven years even after it is shown as "released."

It's worse if you never pay off that tax debt. An unpaid tax lien can remain on a credit file indefinitely, said John Ulzheimer, president of Consumer Education for

On Feb. 24, the IRS released details of new policies regarding the collection of unpaid taxes and liens. Some of this new change will help consumers.

As part of the policy, a federal tax lien could be withdrawn once full payment of taxes is made -- but the consumer must request that the lien is withdrawn. Still, Ulzheimer said the change could be great news -- and boost a credit score -- for some consumers, especially if the tax lien was the only blemish on that credit report.



*Take an interactive Web quiz to better understand how credit scores are calculated:

*Learn details on how credit reports work:

*At the Federal Trade Commission's website, look under consumer protection and then consumer information:

*Consumers can receive a free copy of their credit reports once a year from each of the three nationwide credit-reporting companies at or by calling (877) 322-8228. If you order by phone, your request will be mailed within 15 days.

*Beginning July 21, lenders will be required to provide a free credit score when consumers are rejected for a loan or required to pay a higher rate than the best one available.

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