3 Myths About Your Credit Score

With debt a big part of modern life, many people know they have a credit score and it determines whether they can obtain a loan at a decent interest rate. But after that, confusion reigns.

The most important thing people need to understand about credit scores is what goes into the calculation. Payment and Credit History history accounts for 50% of your score. The amount that you owe accounts for 30%. Applications for new credit and types of credit in your record each account for 10% of your score. This means that 60% of your score can be corrected with the use of credit repair.

Credit scores range from about 350 (lowest) to 850 (highest). Generally the best interest rates go to people with a score above 740. In today's tight credit environment you will have difficulty getting credit with scores under 660 and will likely be forced to pay much higher interest rates.

Credit Myth # 1:

You Have One Credit Score

There isn't just one type of credit score. In fact, there are at least six primary ones that are given to consumers and many more assigned to businesses. The primary driving force behind most of them is the Fair Isaac Corporation, known by most as FICO.

Each of the three credit reporting agencies has a slightly different formula for calculating scores, but all are developed by FICO. Equifax's is called BEACON, TransUnion's is called FICO Risk Score and Experian's is called FICO II. You'll find your credit score is not exactly the same at each agency. The major reasons for the variation in your 3 scores, is because every account that reports to the bureaus, may not report to all 3 bureaus.
Credit Myth # 2:

You Should Close Cards to Improve Your Credit Score

Sometimes when you apply for a loan for a major purchase, such as a mortgage, you're told you can improve your credit score if you close some of your credit cards. Don't believe it. In fact, sometimes when you close an older card you can actually cause your credit score to go down.

That happens for two reasons. First, the best scores go to people who use credit moderately over a long period of time, so the older the cards, the better. If you need to close some accounts, close the newest ones first so you retain the cards with the longest history of prompt payment. If you don't have a credit history you'll find it very hard to get a major loan when you need one.

Second, credit scoring agencies put a lot of emphasis on what is called your 'utilization ratio.' It is essentially your total debt as a percentage of all your available credit. If you lower your available credit by closing cards, your utilization rate can actually look higher, hurting your credit score.

Credit Myth # 3:

You Must Pay Off Your Cards in Full Each Month to Get a Good Score

You may think you have to pay down all your credit cards to zero to get a good credit score. That's not true. In fact, to show you know how to use credit wisely, it doesn't hurt to occasionally pay a card over time. Showing you know how to use credit wisely can actually help you get a better credit score.

If you don't buy on credit and pay everything with cash, you'll likely have a lower credit score because you have no credit history for the credit scoring agencies to use. Not having a score can prevent you from acquiring new credit, if you're having problems acquiring new credit, companies like Minnesota Credit Services can help you establish new accounts with secured credit cards, and credit builder loans. This not only hurts your credit score, but it can also impact your insurance costs because insurance companies do use your credit score when determining rates. They believe people with a higher credit score file less claims and therefore are lower risk, so they get the best insurance rates as well as the best interest rate offers.

The ideal way to use credit is to use 10% to 20% of your available credit and pay all bills on time. The only problem is that everyone runs into a little trouble now and then, and reputable credit repair companies can help you to get back to where you below.