Three Important Credit
Score Myths
By: David Soble
Understanding how your credit score
(“Fair Isaacs Score or “FICO”), is calculated
seems to become more important just when you begin to apply
for a mortgage, an auto loan or credit card. FICO scoring
, involves countless variables that has spawned a credit report
and repair industry that creates as much confusion as it provides
helpful information. The following myths and facts are worth
considering when evaluating and improving your credit score:
1. Myth One: Paying off old collections
is good for your credit score.
Even if several years have passed since an old collection
account has remained unpaid, you can effectively reduce your
credit score if you suddenly begin to either pay off the collection
in full or with payments.
This is because the account now has become activated and the
credit scoring system considers that you now have an “active”
or current collection account. The solution to this problem
is to plan on paying your old collection accounts well in
advance before you make any credit or loan application. Otherwise,
leave the old collection accounts alone unless the decision
maker for your application requires you to address the collections.
2. Myth Two: Credit counseling will
improve your credit score.
Reputable debt management companies can make a difference
by assisting a consumer in reducing their monthly obligations.
They do this by working with creditors to restructure a debt
and set up a payment plan. While this may improve a consumer’s
cash flow, it will actually reduce a credit score because
many creditors report to the credit bureaus that they are
accepting payments under a new or reduced payment arrangement
and that the account is thereby “settled” or being
paid through “credit counseling”. In both instances,
these terms have a negative impact regardless of the benefits
the consumer derives from a debt management service.
3. Myth Three: Your credit score
is based solely on past credit history. Contrary
to popular belief, past credit history weighs only a small
part on your overall credit score. More important factors
are:
- The current outstanding balances carried
on your credit balances. Reducing your balances will improve
your score.
- The type of debt incurred. Mortgage debt,
installment debt and revolving debt carry different weight.
Mortgage payment history carries a greater importance than
that of installment debt, with the least amount of emphasis
placed on revolving debt. Revolving debt payment history
is still very important.
- New Inquiries. The credit reports
pulled by different creditors will affect your credit score.
New inquiries inform other creditors that you are considering
taking on more debt, even if you don’t actually end
up doing so.
Finally, your FICO is comprised of
so many variables that at the back of your credit report,
there will be some (but not all) of the reasons listed for
why your score is what it is. For example, your report may
state, “too many delinquencies”, “too many
account balances”, or “derogatory public record
or collection filed.” When assessing how to improve
upon your score, the back of your credit report is the best
place to start.
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