5 Credit Score Myths Decoded
Published On April 5th, 2011

Myth #1: You only have one  credit score.

Fact: Since you have three credit reports, you actually have three FICO scores. Each credit reporting agency has a different–and somewhat bizarre–name for your score. At Equifax, the FICO is known as the Beacon credit score. TransUnion calls it Empirica. At Experian, the name is quite a mouthful: Experian/Fair, Isaac Risk Model. However, no matter how strange the name, all three use the FICO system of scoring, so why would they be different? Well, since reporting to the bureaus is a voluntary matter, some of your lenders may only report to one of the bureaus, some may report to all three, and therefore, your score will be different, but usually pretty similar. If there is a 50-point disparity or more with one of your scores, you should take a thorough look at your report for inaccuracies.

In addition to FICO scores, each reporting agency has a different scoring model that is available for consumers to track on monthly basis. While these scores are not the actually FICO scores, they provide a good view of the general credit score trends from month to month. Monitoring your credit score will help flag unusual changes in your score and keep you aware of your creditworthiness.

Myth #2: Checking your credit report isn’t as important as keeping tabs on your credit score.

Fact: Monitoring your score without checking your report is like weighing yourself on a broken scale. It may make you feel better to see the number go down (or up, in the case of your score), but it’s just not accurate–and it could be better. So, don’t get me wrong, knowing your score is important, but if you don’t check your credit report–at least once a year–you’re abdicating control over your score. The score, after all, reflects the report. Check your report, fix any errors, and then your score will be a bona fide reflection of your work.

Myth #3: You need to carry a balance on your credit cards to have a good credit score.

Fact: No, you don’t need to carry a balance. Many (like my high school economics teacher) think they have to carry a balance on their cards to get a good credit score, but really they just have to make a purchase and then pay on time. Plus, if you use your credit card for all your purchases and come near your limit every month, that can actually hurt your credit score because it affects your credit-to-debt ratio ( also know as credit utilization). This ratio accounts for a  whopping 30 percent of your credit score. Keep your ratio, at most, between 25-30 percent of your credit limit to avoid a negative impact on your score.

Myth #4: Bad news can affect your score for seven years

Fact: Some of it does, especially the really bad news, like bancruptcy. Chapter 13 (reorganization of debt) disappears seven years from the filing date, but if you file a Chapter 7 bankruptcy (exoneration of all debt), the window is 10 years from the filing date.

But what about that missed payment? How long will that affect your score? While negative notations do stay on your credit report for seven years, this doesn’t mean it will have the same weight upon your score for the entire seven years. The scoring formula places more weight on recent history, so if you had a period of financial instability or irresponsibility in your past, the best way to see your score improve is to keep paying everything on time now, and paying down big balances to improve your utilization ratio.

Myth #5: Shopping around for a loan hurts your score.

Fact: When a lender checks your credit during the loan application process, this will  show up as an inquiry on your credit. And it will ding your score. However, if you are in the market, don’t be afraid to shop around because you think it will destroy your credit. Actually, as long as the same kind of inquiries are made within 14 days of each other, they count as one inquiry on your credit score. Unfortunately, this grace period doesn’t apply to credit cards.

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