Debunking Four Common Credit-Scoring Myths

With the recent tightening of lending standards, credit scores have become more important—and more in the spotlight—than ever before. Yet, even with this increased focus, many consumers don’t understand how the credit scoring system works and often believe persisting myths about their credit reports.

Let’s debunk four common myths about credit scoring:

“Closing accounts will help my credit score.” This may be the biggest—and possibly most damaging—credit scoring myth. While it may be true that having too many accounts (credit card or otherwise) open at once may hurt your credit score, closing accounts is likely to hurt your score because it’s based on your ratio of debt to available credit. If you close unused accounts, your current balances will become a greater percentage of your available credit. Also, closing older accounts can make your credit history look “younger” than it actually is.

“Having my credit report ‘pulled’ will really hurt my score.” Although having your credit report “pulled” can affect your score, the type of inquiry is what matters. For example, you can check your own score as often as you like without penalty, but a credit inquiry for the specific purpose of taking on debt will affect your score. However, the impact of one inquiry will probably lower your score by no more than five points. If you’re shopping for a mortgage and fear that several credit inquiries will add up, don’t worry: Multiple mortgage inquiries within a 14-day period will only count as one inquiry.

“I only have one credit report and one credit score.” You actually have three credit reports with three different credit scores. All three of the major credit-reporting bureaus—Equifax, TransUnion and Experian—offer credit scores using the same formula developed by Fair, Isaac and Company (hence the name FICO). Although all three bureaus use this same formula, each agency has different reporting standards in terms of how far back each looks into a person’s credit history, so your three credit scores could differ from one another by to 50 points.

“My age, gender, marital status, occupation and income can affect my score.” None of this information has any affect whatsoever on your credit score. Your score is based solely on your credit history, your ability to manage debt and your “creditworthiness”—not on any personal information. Your employment is listed on your report, but it doesn’t affect the score itself. As for your income, that may affect your ability to get a loan (or pay off debt), but it won’t directly affect your credit score.

If you have questions about your credit report, talk with your mortgage professional or visit Fair Issac’s website at www.MyFico.com. ∆