Basic Credit Scoring Myths - what does and doesn't effect your credit score

By
Mortgage and Lending with Hunt-Miller Insurance Agency

The Basic Credit Scoring Myths

 

There's a lot of bad information being given as advice about what does and doesn't hurt your credit score.  Below please find some common myths of credit scoring.

 

Closing accounts can help your credit score. 

No, no, no.  ABSOLUTELY NOT: Closing accounts can never help your credit score, and may hurt it. 

 

It's true that having too many open accounts can hurt your score...messing up your debt to income ratios.  But once you've opened the accounts, you've done the damage.  You can't repair it by closing the account, and you can actually make things worse.

 

The credit score looks at the difference between your available credit and what you're using.  Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.

 

The score also tracks the length of your credit history.  Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score. 

 

Rather than closing accounts, pay down your credit card debt.  That's something that actually can and usually will improve your score.

 

Checking your FICO score can hurt your credit.

Applying for new credit is generally what hurts your score.  Ordering a copy of your own credit report or credit score doesn't count.  Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also aren't going to hurt you either-unless you actually take them up on their offers. 

 

If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time.  The FICO score treats multiple inquiries in a 14-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.

 

For most people, one inquiry will generally knock no more than 5 points off a score (and scores typically run from 300 to 850, so that's not a big percentage).

  

Credit counseling will hurt your score as much as bankruptcy.

The current FICO formula ignores any reference to credit counseling that may be in your file.  That's been true for the last three years, after researchers at Fair Isaac, the company that created the FICO scoring system, noticed that people getting credit counseling didn't default on their debts any more often than anyone else.

 

Your ability to get a loan could still be hurt by credit counseling, however.  Your current creditors may report you as late, because you're not paying what you originally owed or because your credit counselor isn't sending your payments in on time.  Late payments do hurt your credit score.

 

Lenders consider other factors besides credit scores in making their decisions, as well.  The factors they look at can vary widely.  Most want to know your income, for example.  Some want to know how much savings you have or whether you're a homeowner.  Some will find credit counseling disturbing, while others may not.

 

The mortgage lenders who don't like credit counseling generally treat its enrollees the same as if they had filed for Chapter 13 bankruptcy.  Chapter 13 is the kind of bankruptcy that requires a repayment plan and is looked at somewhat more favorably than Chapter 7, which allows you to erase many of your debts.  You might still be able to qualify for a loan from one of these lenders, although your interest rates will almost certainly be higher than if you had perfect credit. 

 

If you plan to get a mortgage soon, and you're not already behind on your debts, it's probably smart to steer clear of credit counseling.  If you're already in trouble, however, a good credit-counseling agency might be able to help you get back on track. 

 

Your FICO isn't the only score you need to check. 

This came from lenders who thought the FICO score is offered by only one of the three credit bureaus: Equifax.

 

In reality, all three of the bureaus offer FICO credit scores using the formula developed by Fair Isaac, but they each give the scores a different name.  At Equifax, the FICO is known as the Beacon credit score.  At TransUnion, it's called Empirica.  At Experian, it goes by "Experian/Fair Isaac Risk Model."          

Complicating matters further is that you'll probably have three different scores from the three different bureaus, largely because the bureaus don't all share the same data. 

 

One bureau may list more accounts for you than another, for example, and the differences (in types of accounts, payment histories, credit limits and balances) will be reflected in the score that bureau computes for you.

 

Because of those differences, it does make sense to pull and examine your credit reports from all three bureaus before you apply for a big loan like a mortgage.  Many mortgage lenders take an average of the scores from the three bureaus, or pick the lowest score, when making their decisions, so fixing errors in all three reports before you shop for a loan is smart. 

 

When it comes to comparing your scores, however, you may be stuck.  Equifax is so far the only bureau that makes it easy for consumers to get the same FICO score that lenders see.  The scores typically provided to consumers by Experian and TransUnion aren't FICO scores, and they're different from the scores these bureaus provide to lenders.

 

But the ways you improve your credit score are the same in any case: Correct errors.  Pay your bills on time.  Pay down your debt.  And apply for credit sparingly.

Comments (3)

Michael A. Caruso
Surterre Properties - Laguna Niguel, CA

Hi Melissa,

Thanks for the great info and for sharing.  Have a great week.  Michael A. Caruso

Jun 10, 2008 07:53 AM
Mary PAUL, ABR, CRS,GRI, e-PRO,
RE/MAX Advantage Realtors, Searcy, AR - Searcy, AR

Melissa,

Great post, great tips!  If people only realized how important good credit is! 

Jun 10, 2008 08:12 AM
Melissa Cochran
Hunt-Miller Insurance Agency - Macon, GA

Michael  ---  Mary,

Thank you both for taking the time to read and comment.  I appreciate it and if some shared information turns helpful by helping a client become a homeowner --- it is so worth it.  Again, thank you. 

Melissa

Jun 10, 2008 01:08 PM