A person’s credit score is an integral part of his/her financial life. Your credit scores may be viewed by a lot more agencies, organizations and individuals than you may realize. Everything from banks, credit unions, utility firms, landlords, insurers and even employers may be looking at this information. According to a recent survey, half of Americans don’t honestly know how their credit scores are calculated, or what factors are used to compute those three vital numbers. Here are five common myths about credit scores. Remember, knowledge is power!
Myth No. 1 – The Major Credit Bureaus Use Different Formulas To Compute A Credit Score
This is one of the most common myths about credit scores. The truth is that the major credit bureaus, from Experian, Equifax to TransUnion all have a different term for the same score. What the three different agencies call them is fairly irrelevant for our purposes here but it’s important to understand that the name is just the name. While these major companies do have different names for the credit score, they still use the same formula for coming up with those scores. It’s also important to understand that many lenders look at all three scores to make their lending decision… So watch all three!
Myth No. 2 – To Repair Your Credit Score, Simply Pay-off All Your Debts
The truth is that your credit score will be influenced, and determined by your past credit history, possibly even more than by the total amount of your current debt. While you may be quickly paying-off your credit card debts, and settling any other outstanding obligations, your previous history of late or missed payments will still reflect on your score. As the credit experts often say, it may take time to repair your credit score.
Myth No. 3 – Closing Old Accounts Helps Boost Your Credit Report
This myth’s nothing but a common delusion. The truth is that closing old accounts won’t have as great of an affect your credit score as will the actual debt to credit ration. Simply put, the amount of available credit is one of the biggest factors in managing your credit scores. Paying off an old account will increase your percentage of available credit, while closing that same account will actually reduce the percentage of available credit. You should have no more than 30% of your available credit used at any point. If you have 3 credit cards with a total of $10,000 in credit represented between those three cards, you should have no more than $3000 charged on those cards at any point. Keep in mind, there are a lot of factors that affect your credit score but this myth, if handled incorrectly, can do more harm to your credit score than good.
Myth No. 4 – Loan Shopping Hurts Your Credit Score
Whenever a creditor makes an inquiry about your credit score, the score can drop by as much as five points. Some borrowers often fear that if they shop around for lenders, each time the lender makes an inquiry, their credit score plummets again. The truth is that multiple loan inquiries are generally treated as a single inquiry, provided they come within a 45-day period. What will hurt your credit score is if someone is checking that score every month or two. That leaves the impression that you are constantly trying to buy something on credit. But, if you can substantially reduce your total debt by shopping for a better rate, you will be that much closer to working yourself out of debt much quicker.
Myth No. 5 – A Loan Company Can, For A Small Fee, Fix Your Credit Score
Credit bureaus can’t do anything to soften up or alter your credit score, especially if it’s filled with lots of information about you not handling your debts well. The only way to improve or enhance your credit report, is by showing that you can handle your debt load well in the future.
To improve your credit score, you need to do four things: Reduce your debt load, Pay your bills on time, Remove existing errors in your credit report, and apply for credit occasionally. See Beyond 20/20 is focused on helping you work toward a debt-free life. Check out our “How it Works” section and look at the “Resources” that we added to our sight to help you along that journey.