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
- Closing Credit Card Accounts Helps
- Checking Your Credit Score Hurts You
- Online Home Loan Shopping Dings You
- Paying off the highest interest rate cards first is best for your score
- 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.
Welcome back to VideoCreditScore. There are numerous places to get your credit reports and scores and while it seems to be that everyone is looking for the clear right answer for which product or website is best, it really depends on what you are looking for.
We’ll go through some of the better products here, but also check out the Comparisons Tab to see how each product is different.
If it’s scores you’re after, the only place to get all 3 FICO Scores – again this is the score that most mortgage lenders are using — is on myFICO.com.
If you are just starting out we recommend getting the FICO Complete which features all three FICO scores from myFICO and then signing on to Score Watch to get regular alerts. Why not just get FICO Complete every few months? Well it can be more expensive to go that way as you are trying to guess when your score might change. Why not just get Score Watch? Well you can, but according to 1 study about 20% of consumers can have 75-100 pt differences in their scores from the 3 bureaus, so it might make sense to check with FICO Complete to start.
If you know your score is going to be low, then the Suze Orman FICO Kit is nice alternative to the FICO Complete as it has numerous coaching modules. For just a few dollars more, the Suze Kit has some really nice features such as family sharing, and the credit coach.
If you absolutely feel you need 3 bureau monitoring, we like the Equifax product the best, but all three bureaus have nice offerings here. TU and Experian products feature their own proprietary credit scores.
You may have heard about AnnualCreditReport.com. This is the government sanctioned web site. As of 2004, You are entitled to 3 free reports a year. Unfortunately, you have to pay for the scores, which are only $5-7. Plus, only the Equifax score is a FICO score, the rest are non-FICO scores.
Be careful when you go to find this site. The World Privacy Forum did a July 2005 study that found that there were 233 domains with names very similar to annualcreditreport.com.
While the spirit of AnnualCreditReport is great, a free report without scores is kind of like Abbott without Costello, Jerry without Dean, the Grateful dead without Jerry…man, I sound old. Okay, how about Beyonce without Jayz, Mary Kate without Ashley. Plus, the report products are more barebones than the pay products. But hey, it’s free.
Speaking of free. Be careful with the “Free” language you hear, many sites are touting Free when it’s really a 30-day free trial. These are only free if you remember to cancel — if you intend to. These products can be as much as $150/yr, so you want to make sure you are using them if you are paying that much.
Again, check out the reviews Tab to see our product walkthroughs of various products. In summary, with FICO scores being the most used, we like getting FICO Complete if you’ve never seen your scores, or Score Watch to track your scores going forward.