Everyone knows they have a credit score, and how important that score is, yet there are so many myths out there that people continue to spread. Many people have misconceptions on credit scores and credit reports, so if you fall into this segment of the population do not worry, I am here to dispel several wide spread credit myths. The algorithms to calculate credit scores are vast and complex, but there are some basics to understand. It is better to fully understand the in’s and out’s of credit scoring and credit reports so that you can make more informed decisions based on fact and not myth or rumor. Below I will outline some of the more popular credit myths.
All credit score models are the same:
While it is true that most creditors will use the FICO scoring system, which is indeed based off of your credit report information there are other credit scoring models out there. One scoring system on the market ignores your credit report all together, the LexisNexis risk factor score, though it is often only payday lenders and store accounts that make use of this scoring model. The credit reporting agencies themselves have there own scoring system called the Vantage scoring system. There are several other scoring models out there as well, including in house metrics that individual lenders use.
You can pull your credit report and FICO score each year for free:
Party true. You can obtain a free credit report once a year from annualcreditreport.com but it will not list a credit score. You can use Quizzle for example to get an idea of what your FICO score is but it will not be exact, however it uses the same data that FICO uses to calculate your score and is often within 10 points or less of your actual score. Several credit cards will however provide you with your credit score for free.
Closing a credit card out or paying off a loan early erases its history from your credit report:
Many people believe once that loan is paid off or a credit card is closed that all of its history magically disappears from their credit reports. Nothing could be further from the truth, if you fall into this segment of the population that believes this I hate to break it to you but this information stays on your credit report for 7 years from the date of the last activity on the account. In some cases this information can remain on your credit report for as long as 10 years. If you have black marks on your credit card reporting my advice is to keep the account open and get your account up to date on payments.
Closing out credit cards will boost your credit score:
Many people feel that simply closing out one or more credit cards will provide a boost to their credit score. Nothing could be further from the truth, in fact it could actually do the opposite and lower your credit score. A huge part of your credit score is how many accounts you have, as well as your credit utilization ratio which is a metric of how much of your available credit you are using. When you close down one or more credit cards your debt stays the same but your credit pool shrinks which in turn increases your credit utilization ratio ratio and this is what lowers your credit score. Lenders view people with a high credit utilization as a risk. it is far better to leave the account open unless you are paying an annual fee, in which cases id advise finding a new credit card without an annual fee with the same credit limit, then closing out the card with the annual fee. I should mention annual fees are often negotiable if you call the credit card company.
Your credit score lowers when you pull your own credit report or check your credit score:
The only inquiries that lower your credit score are when creditors pull your credit report and only when you have applied for credit. The only other inquiry that lowers your credit score is when debt collection agencies pull your credit report. When you pull your own credit report this is called a soft inquiry and it only shows to you, creditors will have no idea that you pulled your own credit report. Soft inquiries will never affect your credit score. The damage done by a hard inquiry will fade away over the course of 6 to 12 months time.