Your credit score is an integral part of your financial life. Therefore, you must understand what it’s all about. Lenders, landlords, insurers, utility companies, and even employers look at your credit score. It is derived from what’s in your credit reports, and it ranges between 300 and850.
Yet, according to a recently conducted survey, nearly half of all Americans don’t know how these scores are derived or even what factors are used to come up with them.
For example, if your credit score is 580, you will probably pay nearly three percentage points more in mortgage interest than someone with a score of 720.
Or another way of looking at it is if you had a $150,000 30- year fixed-rate mortgage and your credit score was good enough to qualify for the best rate, your monthly payments would be about $890. According to Fair Isaac, the company that created the FICO score and the rate is named after (Fair Isaac Corporation). However, if your credit is poor, you would likely have to pay more than $1,200 a month for that same loan.
With so much depending on the credit score, it’s essential to understand what it is all about and the things that affect it.
Unfortunately, people commonly have a lot of misinformation and misunderstandings about their credit scores.
Here are five of the most common credit score myths and it the facts:
MYTH #1: The major bureaus use different formulas for calculating your credit score.
FACT: The three major credit bureaus – Equifax, TransUnion, and Experian — give the score a different name. Equifax calls its score the “Beacon” credit score, Transunion calls it “Empirica,” and Experian gives it the name “Experian/Fair Isaac Risk Model.” They all use different names for the credit score, but they all use the same formula to come up with them.
The credit score you receive from each bureau is different because the information in your file that they base the score on is different. For example, the records that one bureau is using may go back a more extended period of time, or a previous lender may have shared its information with only one of the bureaus and not the other two.
Usually, the scores are not too far from each other. Unless there is a big difference between what each bureau says is your credit score, many lenders will use the one in the middle to analyze your application. So, for this reason alone, correcting errors in each of the three major credit bureaus is a good idea.
MYTH #2: Paying off your debts is all you need to repair your credit score immediately.
FACT: Your credit score is mainly determined by your past performance more than your current amount of debt. It will be beneficial to pay off your credit cards and settle any outstanding loans, but it won’t remove the damage overnight if yours is a history of late or missed payments. It takes time to repair your credit score.
So definitely pay down your debts. But it is equally important to consistently get in the habit of paying your bills on time.
MYTH #3: Closing old accounts will boost my credit score.
FACT: This is a common misconception. It’s not closing accounts that affect your credit score; it’s opening them. Closing accounts can never help your credit score and may hurt it. Yes, having too many open accounts does hurt your score. But once the accounts have been opened, the damage has already been done. Shutting the account doesn’t repair it, which may make things worse.
The credit score is affected by the difference between the available credit and the credit usage. Shutting down accounts reduces the amount of total credit available, and when compared with how much credit you can use, your actual credit balances are made to seem larger. This hurts your credit score.
The credit score also looks at the length of your credit history. Shutting older accounts removes old history and can make your credit history look younger than it is. This also can hurt your score.
You generally shouldn’t close accounts unless a lender specifically asks you to do so as a condition for them giving you a loan. Instead, the best thing you can do is pay down your existing credit card debt. That’s something that definitely would improve your credit score.
MYTH #4: Shopping around for a loan will hurt my credit score
FACT: When a lender makes an inquiry about your credit, your score could drop up to five points. Some borrowers think that if they shop around by going to several different lenders, each time a lender makes an inquiry, it will generate another reduction in the credit score. This isn’t true. Multiple inquiries for a loan are treated as a single inquiry for credit score purposes as long as they all come within 45 days. So it is best to do your rate shopping within this 45-day window.
MYTH #5: Companies can fix my credit score for a fee.
FACT: If the credit bureaus have accurate information, there’s nothing that can be done to improve your score quickly if you have a history of not handling your debts well. The only way to have an effect on your credit score is to show that you can manage your debts in the future.
Also, if there are errors in your file, you can contact the bureau yourself. You don’t need to pay someone else to do it. Each major credit bureau has a website that clearly explains what you need to do to correct an error.
So, the best ways to improve your credit score are: to pay down the debt, pay your bills on time, correct existing errors on your credit reports in each of the three bureaus, and apply for credit infrequently
