3 Credit Score Myths

By Chris Daunhauer

Myth #1 – Your credit score is the best indicator of your financial health
It’s not.  Your credit score is a number that purports to be how likely you are to pay back money that you have borrowed.  Dave Ramsey calls it the “I LOVE DEBT” score.  But it’s doesn’t tell how good a person you are, how much money you make, or even how good you are with controlling your spending.  It’s just a number. 

It has become an important number, though, because it is a major factor in your getting approval for loans, and also what interest rate you will be offered on those loans.  It’s also used more and more when seeking employment, renting an apartment, and shopping for auto or homeowner’s insurance.  People with low credit scores tend to be people with “drama” and employers, landlords, and car insurance companies (as a rule) don’t like drama.  So your credit score is important.  But don’t be afraid of it, don’t worship at the altar of FICO, and be aware of what helps and hurts your score and act accordingly.

Myth #2 – You can significantly improve your credit score easily and quickly
You cannot; either by paying someone to “fix” your credit or by doing some tricks on your own.  Most of the companies that promise to repair your credit are scams.  Those that aren’t scams are just hoping you’ll pay them to do something that you could easily do for yourself.  Many people have errors on their credit files, some of them major.  You can (and should) challenge the credit bureaus to correct or remove things that aren’t correct, and you have the right to do so under the law.  But you don’t have the right to get facts taken off your records at the credit bureaus.  You can check your credit file at each of the three bureaus once each year, and you can do this for free at www.annualcreditreport.com

By the way, don’t look for it at freecreditreport.com.  That’s a different website – one developed by one of the credit bureaus to try to lead you into paying them to give you your report and your current credit score.

Myth #3 – Carrying a balance, or carrying lots of debt, or lots of debt on lots of different credit cards will improve your score. 
Sorry, Virginia; this third one is no more true than the first two.  Those behaviors will probably hurt your score more than help it. 

As a rule, the people who have the highest scores are the people who manage their finances well, live in balance, and don’t obsess about their score.  Here’s the factors that influence your score.  Focus on these:

• 35% PAYMENT HISTORY – how faithfully you make payments on existing loans and (in some cases) your rent, monthly utilities, etc.
• 30% AMOUNT OWED ALREADY – how much you owe (in total) vs your income and the amount you owe in comparison to your credit limits.  Maxed out accounts are a red flag to your credit score.  They indicate of borrowers who are struggling to stay afloat.
• 15% – AGE OF YOUR ACCOUNTS – older is better because older accounts show how attached you are to lenders and how well you stick around to do what you promised you would.
• 10% RECENT NEW CREDIT – number and limits of recently established accounts.  Opening several accounts in a short period will hurt your score.  That offer to save 10% just for opening a new store card account at the mall – maybe not such a good idea.
• 10% TYPES OF EXISTING LOANS – Lots of signature loans, payday lenders, cash advances, and credit card debt look bad.  A home mortgage, a car loan, or a student loan looks much better by comparison.

The way to improve your credit score is to do the other money things right.  That means paying your bills on time, following through on your earlier promises (no late payments and no missed payments), and paying off your debt as quickly as you can so that the amount you owe compared to your income and your credit limits get better every month.  Your score will take care of itself if you do these other, more important things well.  And it will improve faster than you think.