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.

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.