10 Myths About Credit Score

Myth: Closing accounts improves score. Closing accounts deletes established history. Be hesitant to close an account, particularly if the account has five or more years of established history. If you have balances, closing accounts will also reduce your total debt ratio, thereby negatively affecting your credit score. Suppose a borrower has two charge cards, each with a credit line of $5,000. That makes total limits of $10,000. If the borrower has a balance of $3,000 on one card and elects to close the other, the borrower's debt ratio jumps from 30% ($3,000 balance / $10,000 limits) to 60% ($3,000 balance / $5,000 limit). Ideally, the balance on any individual account should be kept below 50%, whereas the total debt ratio on revolving accounts should be kept below 30%.

Myth: My credit score is "perfect" because it does not contain any negative items. Credit score takes into account "good" items as well as "bad" items. Yes, charge offs and delinquent payments have a negative effect, but on time payments also have a positive effect. Paid off assets (such as a car, boat or motorcycle) also positively affect credit score. The ideal profile contains no negative items but also includes a long history of "paid as agreed" items.

Myth: There is only one credit score. Every bureau has its own scoring formula, and many lenders have their own proprietary scores that they use for internal purposes. The only true FICO score is sold by Equifax.

Myth: Credit card offers are harmful to credit score. Even though credit card offers may be bothersome, they do not impact credit score.

Myth: Credit scores are based on age, income, sex and marital status. The FICO model is designed to evaluate one thing: creditworthiness. The scoring system is setup to predict how likely a borrower is to repay a debt-nothing more, nothing less. Age, sex, marital status, income and address are not considered.

Myth: Checking your own credit will lower your score. Checking your own credit is harmless as long as it is done via the credit bureaus. Get your free report at www.annualcreditreport.com.

Myth: When you get married your credit scores are merged. Credit scores are individual. There is no such thing as a joint score. However, if you and your spouse open joint accounts, the information reported to the bureaus on those joint accounts (good or bad) will impact both of your credit scores.

Myth: Shopping hurts your score. This myth is partially true, but some shoppers are given a break. The scoring system lumps together multiple auto or home loan inquiries made within a 14-day time frame. As long as you do all of your car shopping within 14 days, the inquiries are lumped together as one inquiry. This provision was implemented to accommodate "shoppers," but it only applies to auto and home loans.

Myth: A divorce decree severs joint accounts. Remember that VISA was not a party to your divorce decree, so they did not agree to sever the responsibility for the account. Just because the judge said that you weren't responsible for the debt does not mean that Bank of America will let you off the hook. Joint accounts with zero balances can be closed, but if the account has a balance, you are still on the hook until the balance is paid in full and the account is closed.

Myth: I don't need to look at my credit report because I always pay my bills on time. Most consumers do not realize that 80% of credit reports contain errors, and 25% of credit reports contain errors serious enough to deny the consumer credit. Check your report for free at www.annualcreditreport.com.

Copyright 2007 Wade Young.

Wade Young is a Colorado mortgage broker. His website is bursting with consumer information about credit scores and mortgages. http://www.reddoorhomeloans.com

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