Biggest Credit Score Myths - Lesson #4
March 26, 2008 by awjolls
Filed under Free FICO Lessons
Today’s lesson focuses on credit score myths. People ask a lot of questions about credit scoring. But, is it because it’s complicated? We think that one thing that makes it appear complicated is the vast number of myths that exist in Credit Scoring. Here’s our list of some of the biggest.
1. Closing Credit Card Accounts Helps
2. Checking Your Credit Score Hurts You
3. Online Loan Shopping Dings You
4. Paying off the highest interest rate cards first is best for your score
5. Needless Disputing is a Good Practice
So, let’s tackle these one by one.
The first one is really one that’s counterintuitive. It seems like closing down credit card accounts should help. In fact, it doesn’t. This comes back to the credit utilization. You want your aggregate credit usage/credit limit ratio to be as low as possible. 20% is Great! If you are like me you have a few store cards that you never use. Just leave them open, but cut up the cards, or hide them in a safe place.
The second myth, checking your score hurts you, has a history. It used to be the only way to get your credit score, was from a lender, and when lenders check your score it’s for an application - so that impacts your score. So when the bureaus and myFICO started making scores available, they reached a consumer that was leery of the impact. The truth is, as long as you are not talking to a lender or credit card or other loan related company, you are fine. If you order from the bureaus, annualcreditreport.com or myFICO, you won’t impact your score AT ALL. Again, watch out for the broker with a free offer to pull your credit for you. He’s doing this to win your loan. This could hurt you. You can pull your scores safely by connecting through our website.
The third myth, online shopping causing numerous inquiries, is also historical. Pre-internet [caveman], you were likely to just use one lender for a loan, so someone really applying in multiple locations seemed risky. But even pre-internet, the folks at Fair Isaac had to figure out how to deal with someone wanting a second bid, so they created a 30-day window where all loan applications are treated as 1 inquiry. This is clearly a necessity in today’s world where consumers use websites like LendingTree and eLoan to shop for loans. Incidentally, there’s a study out that consumers that get more than 1 loan offer usually get better rates. So shop around!
Paying off the highest rate cards is best if you are trying to save money, and that will ultimately help your score. However, in the short term, if you are after higher scores, you want to pay off the highest utilized cards first. For example if you have 3 cards, a visa, a home depot and a pottery barn, it would make financial sense to pay off the pottery barn one first as in our example, it has the highest rate. But if it’s your score you want to impact, maybe so you can get a home equity line to payoff the cards completely, you want to pay off the home depot card as it’s impacting your credit utilization ratio the most and then the chase visa and work on the pottery barn one. Remember this is an example. Your first step will be to figure out what rates you have on your cards. The key here is, while the aggregate ratio here will not change at all, credit scores also look at your individual ratios.
One caveat, if you are NOT needing to use your score in the next 12-18 months for credit, then PLEASE pay off by interest rate first, you can always work on your score closer to when you need it. Got it?
Needless disputes are just that… needless. First off, what’s a dispute? If you believe information is incorrect on your credit report, you can dispute it with the bureau to have it removed. By law, they must verify with the creditor and if they don’t hear back, remove the item. But some people out there think that disputing correct info will succeed in having it removed. A] this is wrong b} it won’t work and c] did I mention this is wrong.
Don’t waste time trying to “trick” the scoring machine. That said, as I mentioned in an earlier lesson, the 2004 PIRG study pointed out that nearly 79% of credit reports have errors and that 25% are potentially score impacting. So, Take a close look at your reports to make sure everything is correct. Don’t waste time disputing your birthdate, if that’s the only item, but do dispute things you are sure are false, like a credit card you never owned, etc. Since most of us don’t like to write letters anymore, the Suze Orman FICO Kit has a nice tool to generate them for you. Note that this can take some time to clear up. While the bureau is obligated to respond in 30 days, some back and forth may occur. It doesn’t happen overnight, but depending on your situation, it can be worth it.
We are always looking for more myths to bust, so if you have a good one send it to us at info [at] videocreditscore.com.
In the next lesson, we will discuss credit scores and marriage and divorce.
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