Truths and Myths about your Credit Score

There are several very important truths about your credit score:

Truth #1: Your credit score is the single most important factor determining whether you’ll get approved for a mortgage, car loan, refinance loan, or credit cards.

Truth #2: Your credit score affects your APR.  If it’s low, you’ll pay very high interest rates, up to 23%.

Truth #3: Your credit score may affect how much you pay for car insurance, since insurance companies usually run a credit check before selling you insurance.

Truth #4: Your credit score may even affect whether or not you are hired for a job, especially if it’s a managerial or financial position.

Truth #5: You have three credit scores, one from each of the three major credit bureaus, and the scores may vary by as much as 50 points or more.

There are also many widely distributed untruths, or myths, about credit scores:

Myth #1: Checking your own credit will lower your score.

The truth is you can check your credit through the bureaus or a legitimate score seller like MyFICO.com, as often as you wish without impact.

Myth #2: Your age, employment, race, gender, and income are factored into your score.

Personal information, net worth, and income do not affect your credit score. However, eliminating debt will improve it.

Myth #3: Credit Repair companies can remove all negative information.

You can dispute inaccurate information and credit agencies are obligated to investigate credit inaccuracies within 30 days or remove disputed information. However, no one can remove negative (but accurate) information from your credit report.

Myth #4: Too many credit card offers and shopping for loans will hurt your score.

It’s true that too many inquiries will lower your score. However, you can shop for a mortgage, home equity loan, or car loan as long as these inquiries are made within 14 days of each other, so they count as one inquiry.

However, this grace period does not apply to credit cards. Credit card offers do not affect your score as long as you don’t respond to them and use all the credit available to you. However, if the ratio of used-to-available credit is high, it reflects a higher risk. Always keep balances below the available credit line.

Myth #5: Marry your spouse and you marry his (or her) credit.

You do not inherit your spouse’s good or bad credit. However, unlike many marriages, your own credit, good or bad, lasts forever.

And when you open joint accounts, the information is reflected jointly, on each of your credit reports.

Credit Suicide

By: Chris Brown

Few things influence the home buying process more than your credit. I like how Clark Howard refers to the three credit repositories as, “the three screw-ups”. There is some validity to that, and hopefully recent legislation will help clean up many of the inaccuracies. Regardless, lenders need a source to determine levels of risk for lending money… and the Fair Isaac Company is where it lies. (Note: Fair was one of their last names… doesn’t necessarily denote fairness.) There are close to 50 different things that influence your credit; some good, some bad. Within those 50, there is some 14,000 variations…talk about a fragile balance! For example, did you know that if you pay off a collection it might actually lower your score! Don’t worry most lenders don’t know it either. Also, beware of credit counseling services that promise all kinds of miracles. The only things that can be legitimately removed from your credit are things that are invalid, erroneous, or outdated. Aside from that, if it is yours… it’s yours. There may be ways to “flower it up” but it isn’t coming off. (Being intellectually honest, you know it shouldn’t either.)

If you are going to be hunting for a home, be sure to curtail the temptation to go out make purchases that may affect you credit. Obviously you wouldn’t want to go buy a car, but other things that may not be quite as obvious may be the purchase of furniture or home improvement items that would need financing. Chances are you may need these things, but wait till after closing.

What is the biggest credit mistake?

You wouldn’t believe how common it is! The biggest credit mistake that most of us make is closing our old paid off credit cards. I know that is seems like the right thing to do when you pay off the balance but 15% of your FICO score is made up of your credit history. If you close a credit card with no current balance that you’ve had for years, you are getting rid of a lot of your credit history.

Another 30% of your FICO score is made up by your Debt to Credit Limit ratio. With this component, you show how well you manage the credit extended to you by using it wisely and judiciously. Let’s say that you had two cards with $2,000 limits and one was maxed out and the other one was just paid off. Well you have $4,000 of credit extended to you and you’re using almost $2,000 of that credit (you don’t want to go over 50%). Now you cancel the paid off card and your new debt to credit limit ratio is 100% ($2.000 out of $2000). Ouch, that hurt your credit score.

Conclusion:
Take care of your credit score. Your financial health depends on it.