Credit Score Myths
There are several myths about credit scores. You need to fully understand what will affect your credit score if you plan on improving it.
Hopefully you all know that when you apply for any of the following, a mortgage, a credit card, or a home equity line of credit, the company you are applying to will check your credit score. Your credit score is determined by your past ability to make on-time payments and how you have managed your credit. Credit scores range between 300 and 850, with an average score ranking around 680, based on Experian`s 2005 National Score Index. If your credit score is considered low, almost all lenders will consider a score of below 615 to be high risk and you probably will not secure the loan you desire. If you are fortunate enough to get the loan with a poor credit score you will almost undoubtedly have to pay back the loan with a very high intereste rate attached to the loan.
Any financial venture that you pursue will have everything riding on your credit score number, it is very important to understand the various factors that will affect it. You can rest assured that there is a lot of incorrect information floating around about credit scores. Below you will find 6 of the most common credit score myths and the facts to back them up.
MYTH NUMBER 1: The 3 major bureaus all use a different formula to figure out your credit score.
ANSWER: Equifax, Experian and TransUnion, the three major credit bureaus all sell their services under different names, but they all have the pretty much the same algorithm to come up with their figures. A credit score will vary slightly between the 3 bureaus simply because each has slightly different information on file for you. Some examples could be that one bureau`s records may be older, or a previous lender may have shared its info with only one bureau and not the other two. Most lenders will pick the number in the middle and assign that report to your loan process.
MYTH NUMBER 2: If you close out your old accounts it will increase your credit score.
ANSWER: Having too many credit accounts can certainly affect your credit score in a bad way, but by canceling you are not guaranteed to have them improve. Actually, by doing that you could do harm. Credit bureaus want to see how you handle debt and will look to see how much you are by comparing untapped credit to your current debt load. If you close unused accounts it will reduce your untapped credit and may make you appear overextended. Closing out your old accounts is the worst thing you could do because the longer a line of credit has been open, the longer your track record will be with that particular company. If you do choose to close any accounts, you should consider closing new accounts and transfer your balance to your oldest accounts.
MYTH NUMBER 3: If you shop around for a home mortgage or a new car loan it will hurt your credit score.
ANSWER: When a lender inquires about your credit score it can possibly drop somewhere around five points. Because your score drops, many borrowers are scared that by simply shopping around for a home mortgage or new auto loan they will incure multiple point deductions. This simply is not true! The truth is that even though you are simply looking for one single loan several lenders can request your credit score report. All loan inquiries made 30 days prior to you choosing your loan will not have a negative affect on your score. To determine your current credit score, the different credit agencies will take a look at any mortgage or auto inquiries made in the previous two years and are older than the 30 day window. If indeed there were inquiries in the 2-year window, all inquiries that fall in that period will be counted as one to determine your score. The length of the period will vary depending on which version of the FICO scoring formula is being used by your lender. The periods range from either 14 days to 45 days
MYTH NUMBER 4: If you pay off your debts you will instantly repair your credit score.
ANSWER: A credit score is a record of your past performance, it is not your current debt load. By paying off credit cards and taking care of any active loans you will certainly help your situation, but if your history shows a lot of late or missed payments, it cannot correct prior damage quickly. Trying to improve your score takes time so make the most of your credit by paying off your bills in a timely fashion and put as much money on outstanding debt as possible.
MYTH NUMBER 5: For a fee you can have a company fix your credit score.
ANSWER: It is possible that you could receive an offer from a company claiming that they will help you fix your credit rating. Truth be told the various credit bureaus already have the most up-to-date accurate information. That being said there really is nothing anyone can do to help you improve your credit score if you didn`t managed your debts well in the past. Realisticallly the only thing that will effect your credit score is your ability to manage your finances wisely. Additionally, you do not need to pay anyone to correct errors in your file, you can always contact the credit companies directly. The 3 major bureaus all have detailed instructions on how to do this on their sites.
MYTH NUMBER 6: If you request your own credit report it will effect your current score.
ANSWER: The three credit bureaus will not penalize you for simply checking your own credit score, and they don`t deduct points for inquiries from anyone else who may check your score with your permission. In all honesty, it is recommended that you check your own credit score with all three bureaus occasionally, especially if you plan to apply for a new loan in the near future. If you do this you can find and correct anything on your report that you find erroneous