A recent survey, however, found that almost half of all Americans don't know how these scores are made or what factors are used to make them.
- Fair Isaac, the company that made the FICO score and after which it is named, says this is the case (Fair Isaac COrporation). But if you have bad credit, you would probably have to pay more than $1,200 a month for the same loan.
Since so many things depend on your credit score, it's important to know what it is and what factors affect it.
People often have a lot of wrong information and misunderstandings about their credit score, which is a shame. Here are the real facts about five of the most common credit score myths:
MYTH #1: Your credit score is calculated in a different way by each of the major credit bureaus.
FACT: Equifax, TransUnion, and Experian, the three biggest credit bureaus, all call the score by a different name. Equifax calls their credit score "Beacon," Transunion calls it "Empirica," and Experian calls it "Experian/Fair Isaac Risk Model." They all call the credit score by different names, but they all use the same formula to figure it out.
Each credit bureau gives you a different credit score because the information in your file that they use to calculate the score is different. For example, the records used by one bureau may go back further than those used by the other two, or a previous lender may have only shared information with one bureau and not the other two.
Most of the time, the scores are not too far apart. If there isn't a big difference between what each bureau says your credit score is and what the other bureaus say, many lenders will just use the one in the middle to evaluate your application. So, just for this reason, it is a good idea to fix any mistakes in each of the three major credit bureaus.
MYTH #2: All you have to do to fix your credit score right away is pay off your debts.
Your credit score is mostly based on how well you've done in the past, not how much debt you have now. Paying off your credit cards and settling any outstanding loans will definitely help, but if you have a history of late or missed payments, it won't fix everything overnight. Fixing your credit score takes time.
So pay off your debts right away. But it's just as important to make it a habit to always pay your bills on time.
MYTH #3: If I close old accounts, my credit score will go up.
FACT: This is a mistake that many people make. Opening new accounts has a bigger effect on your credit score than closing old ones. Your credit score will never go up if you close accounts, and it may go down if you do. Yes, it does hurt your score to have too many open accounts. But the damage has already been done once the accounts have been opened. Closing the account won't fix the problem, and it may make things worse.
The difference between how much credit is available and how much is being used affects the credit score. When you close an account, the total amount of credit you can use goes down. This makes your actual credit balances look bigger when compared to how much credit you can use. This is bad for your credit rating.
The length of your credit history is also part of your credit score. When you close older accounts, you get rid of old information, which can make your credit history look younger than it is. This can also hurt your grade.
Most of the time, you shouldn't close accounts unless a lender asks you to as a condition for giving you a loan. Instead, the best thing you can do is pay down the credit card debt you already have. That would definitely make your credit score better.
My credit score will go down if I look around for loans.
When a lender checks your credit, your score could go down by up to 5 points. Some borrowers think that their credit score will drop every time they go to a different lender to look for a loan because each lender will do a credit check. This is wrong. As long as they all happen within 45 days of each other, multiple loan inquiries are counted as just one for your credit score. So the best time to compare rates is during this 45-day window.
MYTH #5: I can pay a company to fix my credit score.
FACT: If the credit bureaus have correct information, you can't quickly raise your score if you have a history of not paying your bills on time. Your credit score will only change if you show that you can handle your debts in the future.
Also, you can call the bureau yourself if there are mistakes in your file. You don't have to hire someone to do it for you. Each of the major credit bureaus has a website that tells you exactly what you need to do to fix a mistake.
So, the best ways to improve your credit score are to pay down your debt, pay your bills on time, fix any mistakes on your credit report at each of the three bureaus, and not apply for credit very often.
