Biggest Credit Score Myths – Lesson #4

March 26, 2008 by  
Filed under Credit Score Lessons

This 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.

Credit Score Myths

  1. Closing Credit Card Accounts Helps
  2. Checking Your Credit Score Hurts You
  3. Online Home 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 counter intuitive. It seems like closing down credit card accounts should help your credit score but 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 links in our ads or links under the How To Get Your Credit Scores area to the right.

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 home loans. Incidentally, there’s a study out that consumers that get more than 1 loan offer usually get better rates. So shop around!  However, this 30-window only applies to home loans. Student loans, do not have this de-dupe inquiry feature.

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 credit 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 credit 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. There are also numerous credit dispute letter samples in our resources section. Note that this can take some time to clear up. While the credit 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.

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Comments

33 Responses to “Biggest Credit Score Myths – Lesson #4”

  1. Claire on March 18th, 2009 11:52 am

    Actually, it may be worth it to dispute your birthdate. Transunion had my birthday off by a month, and this led to rejected credit card applications on at least 3 occasions over the last 3 years. That’s 3 inquiries that dinged my score but resulted in no benefit to me. It was also annoying having to prove my identity every time I applied for credit. When I finally found the error and corrected it, my Transunion score jumped 6 points (and I already had an excellent score of 787). Could be coincidence, but the timing suggests otherwise.

  2. awjolls on March 19th, 2009 9:55 pm

    You make a great point. Alow me to clarify. You should correct all data in your file for identity purposes, but many things won’t impact your credit score. Your 6 point change was a coincidence. My score changes by 10 points or more quite easily throughout the year. Plus, think about the controversy a name change leading to a score change could cause. I can see the headlines now – scoring system likes Smiths more than McGees, etc.

    The good news about inquiries is that at 10% of the score, they often just have a short term impact. Congrats on your excellent score!

  3. Brenda on May 27th, 2009 1:24 pm

    Question: What do I do when I have paid off over $30,000 in credit card debt in the last 60 days and it is still showing on my credit reports as owing? I have contacted both the credit card companies (2) as well as all three credit bureaus and they keep blaming each other regarding reporting. I want to apply for a mortgage in the 60+ days and I don’t what to do to get them to be accountable for accurate reporting.

  4. Michelle on June 5th, 2009 3:11 pm

    My husband seems to think that bad credit falls off your report after 7 years, I believe it to be a myth.

    What does happen after 7 years?

  5. jim elkins on June 5th, 2009 3:17 pm

    What about medical bills ? I try to pay them as i can .But not good enough for them

  6. VideoCreditScore-Andy on June 6th, 2009 7:24 am

    Most credit items stay on for 7 years, so he’s mostly right… i know..rare for a husband. Most bankruptcy items take 10 years to fall off. Bankruptcy: Chapters 7, 11, and 12 remain for 10 years from the filing date. Chapter 13 remains for 7 years from the filing date.

  7. VideoCreditScore-Andy on June 6th, 2009 7:31 am

    Jim, one of the things about medical bills is that they can be negotiated in many cases. Hospitals want to get paid, See this http://www.usnews.com/articles/business/your-money/2007/11/29/5-ways-to-lower-your-medical-bills.html . The biggest thing is getting the courage to ask.

  8. VideoCreditScore-Andy on June 6th, 2009 7:47 am

    Great question. Thanks Brenda. I resource you have is to file a formal credit dispute. The bureaus MUST reply in 30 days WITH proof that the accounts should be there. With your dispute letter, send off copies of your paid bills and send it CMRRR – certified mail return receipt required.

    http://www.videocreditscore.com/doing-credit-report-dispute/

    All this said… I’d be surprised if they didn’t correct this in the next 30 days anyway. But, no reason to risk it.

    See these posts.

    http://www.videocreditscore.com/find-a-sample-credit-dispute-letter/
    http://www.videocreditscore.com/credit-resources/credit-report-dispute-letter-sample/

  9. Sarah Wilson on August 28th, 2009 1:59 pm

    I’ve recently been approached by an organization claiming they can reduce the interest rates on ALL of my credit cards with rates over 10.0%, to a temporary promational rate for 6-12 months at 0%, then a lifetime fixed rate of 3.99 to 6.99%. This is supposedly at no cost to me, won’t close my accounts, and I will continue to pay my credit cards as usual, just at a lower rate. They are claiming this action WILL NOT affect my fico, and the credit card companies are happy to accommodate the request, as long as I’m in current good standing, and have a Beacon of 725 or higher. Will or will this not affect my fico if I choose to go this route? Thanks so much for your advise!!!

  10. VideoCreditScore-Andy on August 28th, 2009 2:45 pm

    I have a general rule, things that are too good to be true are usually too good to be true. Tell me who the organization is. Have you Googled them? Do a Google search this way, search on “company name scam” and see what comes up. Look, I have great credit and my rates are over 10%. The national average is 13%. And the national average FICO is 720. So how can they get way above rates for 50% of the population? What are they charging for this service? Sorry, this just sounds a bit fishy.

  11. RICK on August 30th, 2009 3:08 pm

    Is there a way i can see what myfico scores were in 2000 or any previous year?

  12. VideoCreditScore-Andy on September 8th, 2009 9:31 am

    Great question! Sadly, no. The scoring system only provides current snapshots when requested. Tracking score products like Score Watch only started this a few years ago. If you didn’t pull a score from back then, no company would be able to track your score at that time.

  13. Katie on October 26th, 2009 4:10 pm

    Hi,

    I was trying to watch your videos but it says they are no longer available. Is there somewhere else I can go to find them?

    Thanks,
    Katie

  14. VideoCreditScore-Andy on October 26th, 2009 5:40 pm

    Katie, it should be fixed now. Sorry about that. Let me know if you have any questions.

  15. Linda Randazzo on November 3rd, 2009 1:43 pm

    This is clearly a necessity in today’s world where consumers use websites like LendingTree and eLoan to shop for home loans. Incidentally, there’s a study out that consumers that get more than 1 loan offer usually get better rates. So shop around!

    My question:

    “However, this 30-window only applies to home loans. Student loans, do not have this de-dupe inquiry feature.” (does this apply to auto loans as well?)

  16. VideoCreditScore-Andy on November 3rd, 2009 2:40 pm

    Linda, You are correct! It only applies to mortgages. Auto loans and student loans get no shop around treatment. Consumers must be very careful when doing this for car loans and student loans then. Only apply once you have chosen the best choice for you. Yes, I agree that these loans should also get the 30 day treatment mortgages get.

  17. Donna on March 5th, 2010 11:36 am

    Andy,

    Mine is a two part question.

    Does obtaining a secured credit card help boost your credit score, and if so, do you have any suggestions of which card to use…. there seem to be some pretty shady companies who offer it.

    Thanks for your time
    Donna

  18. Tracie Godri on March 15th, 2010 1:54 pm

    My husband has a credit score of 845 and mine is just about 20 points lower. We just went in to purchase a car and the salesperson told us that credit scores go up to 900. We owned rental properties in the past and my research then was that it was only up to 850. So I started researching this new information and there is very conflicting statements from the 3 credit bureaus and from FICO. Some say it’s only 850 and some say 900 (with very rare individuals who would get close to that).
    Any information would help.
    Thank you!

  19. VideoCreditScore-Andy on April 2nd, 2010 3:34 pm

    There are lots of scoring models out there. FICO goes to 850 – in general, but there are flavors of FICO scores. Ask which score system they use, and where your score ranks. Also, shop different dealers [i.e. other cars] to see what scoring model they use. If he has a 845, then they are most likely using a non-850 score. See this post to see an example

    http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/An-849-Auto-Score/td-p/21836;jsessionid=DE7F8B251FD1959AA5A47B907E5E0D9C

  20. VideoCreditScore-Andy on April 2nd, 2010 3:45 pm

    Donna, yes a secured credit card is a good idea. I like to recommend going through a big bank that you have your checking account with. This protects you from the shady operators. Read this. http://www.videocreditscore.com/secured-credit-card-credit-score/

  21. Scott Kehiaian on April 28th, 2010 10:42 am

    I read that if you have more than two credit cards that you would be penalized 10 points for every card over two. Is this correct?

  22. VideoCreditScore-Andy on May 11th, 2010 7:14 pm

    Scott, this rumor is crazy. Many people with great scores have more than two credit cards. Having 20 cards is a bad idea, but 3 – 4 is fine. It’s how you use the cards that matters more. Hope that helps!

  23. Betty Brock on May 22nd, 2010 11:34 am

    So if the debt falls off in 7 years, do the points get added back to your score?

  24. VideoCreditScore-Andy on May 28th, 2010 8:58 pm

    It’s not an instant impact at falloff. Slowly your fico score rises as time passes. So your score shouldn’t change that much from 6.8 years and 7 years, as an example. This is how people with bankruptcies can have great scores 2 years after a bankruptcy even though it won’t fall off their report for 10 years.

  25. phil on February 21st, 2011 11:48 am

    Does paying off credit card balances on accounts that are closed and over three years old help my credit score? If I settle these accounts for less than the full amount owed, will this help my score?

  26. John on February 27th, 2011 5:55 pm

    We’re told that checking your credit score does not impact your credit score. Does checking your credit report inpact one’s credit score? And does disputing errors on your credit report impact your score?

    I had to dispute errors on my credit report up to a dozen time in eighteen months. It took that many times to finally get several accounts corrected. Does that negatively impact my credit score. From what I’ve see, the more errors that I’ve corrected the and along with three years of excellent payment history, the more diverse my credit mix the more my score has decreased. I only have a 2% ratio of credit to income. One score has actually gone from good to poor without any derogatory informatoin being reported during that time period.

  27. VideoCreditScore-Andy on March 5th, 2011 4:41 pm

    It’s not the checking of your scores that causes the decrease. It’s the fact that a change causes a date reset and that often lowers the score. For example, fixing a 6 year old debt might seem smart, but the date will be reset and while the news will be good, the reset date often causes a decrease in score. The algoritms must show that users who make these changes are still at risk. A bummer. I know. But time will heal all.

  28. VideoCreditScore-Andy on March 5th, 2011 4:50 pm

    It depends. While it should help. Often times we see that people are getting dinged for the date reset. When you settle, the new date is posted and that can cause a score drop. This may recover fast however. When people are close to 6 years, I usually tell them to ride it out as it will be removed after 7 years.

  29. James on May 12th, 2011 6:12 pm

    Is it legal for a collection agency to report balance increases to a reporting agency every 2 weeks? I have an alleged account that has been charged off and sent to NCO for collections. I recently purchased Scorewatch and have been receiving alerts every week to 2 weeks because of balance increase to the acccount. They seem to be randomly increasing the balance from $5 to $6 dollars every two weeks. This seems illegal………

  30. Tonya on July 13th, 2011 4:35 am

    How long does it take for credit inquiries to disappear from your credit report. I shopped on line for a car and the website shopped my info. out to several dealerships and banks.

    Thank you,
    Tonya

  31. VideoCreditScore-Andy on August 19th, 2011 3:31 pm

    They won’t disappear, but all inquiries in a 30 day window are treated as 1 inquiry. This approach allows consumers to shop around.

  32. Shel on July 22nd, 2012 6:13 pm

    Hello,
    I am in my early twenties, so I have some credit, but not very much. I have taken out school loans (from the government) and I just bought a new car…well, I am financing it. That being said, I have never had a credit card and I have been looking into getting a Best Buy credit card so I can finance an iMac and start my own photography business. I was wondering how this might affect my credit. Is it better to get a general credit card such as American Express or Capitol One? Where should I start?

    Thank you,
    Shel

  33. VideoCreditScore-Andy on July 29th, 2012 12:40 pm

    Shel, there isn’t much different in building credit when it comes to the choices you mentioned — they are all revolving credit — a store card is a good place to start. If you get declined you may want to build credit by getting a personal loan from a bank – call it bank of X — and then pay that off and apply to get a credit card from bank of x. Best of luck.

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