5 Common Credit Score Myths

Your credit score is an integral part of your financial life. It is important that you 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 and 850. There are also multiple credit score models that can result in different credit scores.

According to a survey that was recently conducted, 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 are probably going to pay nearly three percentage points more in mortgage interest than someone who had a score of 720.

Another way of looking at it, 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. This is according to Fair Isaac, the company that created the FICO score and who the rate is named after (Fair Isaac Corporation). If your credit is poor, however, it is very likely that you would have to pay more than $1,200 a month for that same loan.

Or you may have a score of 680 when applying for a credit card or 710 when applying for an auto loan because of the different credit score models that are used.

With so much depending on the credit score, it’s important to understand what it is all about and what are the factors that affect it.

Unfortunately, people commonly have a lot of misinformation and misunderstandings about their credit score. Here are five of the most common credit score myths and along with it the true 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 models a different name. They all use different names for the credit score, but they all use the same formula to come up with it. Keep in mind there are different formulas that are used by different creditors depending on what you are applying for (Car, Personal loan, Credit Card, Mortgage etc) This will result in different score calculations. As long as the bureaus use the same score model and have the same reporting information the score will be the same.

The reason that the credit score you receive from each bureau is different is because the information in your file that they base the score model on is different. For example,the records that one bureau is using may go back a longer 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 just use the one in the middle for the purpose of analyzing your application. So, for this reason alone it is a good idea to correct any errors that exist in each of the three major credit bureaus.

MYTH #2: Paying off your debts is all you need to do to immediately repair your credit score.

FACT: Your credit score is mostly determined by your past performance rathe than your current amount of debt. Also the amount of available credit (Credit Cards) and there balances can greatly affect the score. It will definitely be very helpful to pay off your credit cards and settle any outstanding loans, but if yours is a history of late or missed payments, it won’t remove the damage overnight. 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 affects your credit score, it's opening them. Closing accounts can never help your credit score, and may actually hurt it. Yes, having too many open accounts with high balances does hurt your score. But once the accounts have been opened,the damage has already been done. Shutting the account doesn’t repair it and it may actually make things worse.

The credit score is affected by the difference between the credit that is available and the credit that is being used. 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 actually 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 just 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 a number of different lenders that each time a lender does an inquiry it will generate another reduction in the credit score. This isn’t true. For credit score purposes, multiple inquiries for a loan are treated as a single inquiry, as long as they all come within a 45 day period and 10-15 days for some score models.

MYTH #5: Paying a Debt Removes it off your credit report

FACT: Pay off a debt and you've eliminated your obligation — but the evidence of that debt can stick to your credit report for years. If you pay your debts on time and in full, you will likely want your paid-off accounts on your credit report because they show that you've used credit responsibly. If, on the other hand, you've been chronically late, missed payments or defaulted entirely, that's a problem. Most negative information can remain on your report for up to seven years; some bankruptcies can stay there for up to 10 years. Credit repair services are able to have the negative information removed much sooner than the 7 or 10 year requirement.

So, the best ways to improve your credit score are: pay down the debt,pay your bills on time, open new credit (Revolving Accounts), keep credit card balances low (30% of limit) and have credit repair services if need.

At Valiant Credit Services we can help answer any further questions you may have. You can schedule a free credit consult and credit analysis. You can do this by visiting https://www.valiantcredit.com/book-online/free-credit-consultation-by-phone/book