5 Common Myths About Credit Scores
A person’s credit score is an integral part of his financial life. A lot of agencies and individuals regularly look at your credit score, from banks, credit unions, utility firms, landlords, insurers and even employers. According to a recent survey, half of Americans don’t exactly know how their credit scores are derived, or what factors are used to compute those three vital numbers. Here are five common myths about credit scores.
Myth No. 1 – The Major Credit Bureaus Use Different Formulas In Computing 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. TransUnion for example, calls it the Empirica, while Experian calls it the Experian/Honest Isaac Risk Model. While these major companies have different names for the credit score, they still use the same formula for coming up with it. While the names used by the major credit companies are essentially the same, lenders often use just one credit report, to analyze your loan application.
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, and not by your current amount of debt. While you may be currently 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 takes time to repair your credit score.
See also “The Art of Damaged Credit Repair.”
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 affect your credit score, but opening these old accounts will surely hurt your score. Having to many accounts also does damage to your credit score, because your score is usually affected by the difference between the available credit and the credit that’s being used. Shutting-off an old account only helps to make your credit report look young and fresh, but the damage has already been done before.
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. It would help if you do your loan rate shopping within the 45-day window.
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.