UNDERSTANDING YOUR FICO SCORE CRITICAL TO MANAGING CREDIT HEALTH
Credit scores give lenders a fast, objective measurement of your credit risk, and the one most widely used score is the Fair Isaac Corporation (FICO), which was developed in 1989. While a credit score is perhaps the most important item in a consumer's financial resume, the vast majority of Americans don't know their credit score -- or even how to find out what it is. In fact, a study commissioned several years ago by the Consumer Federation of America found that only 2 percent of Americans knew their credit score, and only 3 percent could, unprompted, name the three main credit bureaus. According to FICO, understanding credit scoring can not only help you manage your credit health, but also empower you to take actions that will lower your credit risk; thus raise your score over time. Bankrate.com has identified the 12 most common credit report myths:
Myths
- Paying my debts will make my credit report instantly pristine. The reality is that a credit report is a history of your payments, not just a snapshot of where you are at the moment.
- I must give permission for a company to see my credit report. Not true… the fact is that unless it's for employment purposes, your signature or consent is irrelative.
- Credit counseling always destroys my credit score. This is definitely not true. Attending a credit counselor's debt management program is not considered negative in the scoring models.
- Canceling credit cards boosts my score. Experts agree that most creditors want to see at least two or three pieces of active credit to prove you can manage debt responsibly.
- Too many inquiries hurt my score. Perhaps this used to be the case, but nowadays, credit agencies recognize when a consumer is simply comparison-shopping.
- Checking my own credit report harms my standing. The reporting agencies distinguish between soft and hard pulls. If a creditor checks your report, it falls under hard pull. But if you check your own report, it falls under soft pulls, which do not reflect negatively on the evaluation.
- FICO scores are locked in for six months. The fact is, your FICO score changes as soon as data on your credit report change.
- I don't need to check my credit report if I pay my bills on time. Even if you pay your bills on time, you need to check your report regularly to ensure all information is being reported correctly.
- All credit reports are the same. Not true. While most creditors across the country do report their information to all three major agencies: Equifax, Experian and TransUnion, not all three reports will necessarily have the same records and scores.
- A divorce decree automatically severs joint accounts. While the judge may have rubber-stamped your plans to divide debt, that carries no legal weight with the creditors themselves.
- Bad credit comes off in seven years. Some of it does. Chapter 13 disappears seven years from the filing date, but if you filed Chapter 7 bankruptcy, the window is 10 years from the filing date.
- I can always pay someone to fix or repair my credit. Yes, you can clear up false information posted to your account, but if you in fact failed to pay a debt, it will remain on your credit file.
Fair Isaac offers the following tips for raising your score:
- Pay your bills on time;
- If you have missed payments, get current and stay current;
- Be aware that paying off a collection account or closing an account on which you previously missed a payment, will not remove it from your credit report;
- If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor;
- Keep balances low on credit cards and other “revolving credit”;
- Pay off debt rather than moving it around;
- Don’t close unused credit cards as a short-term strategy to raise your score;
- Don’t open a number of new cards that you don’t need, just to increase your available credit;
- If you’ve been managing credit for a short time, don’t open a lot of new accounts to rapidly;
- Do your rate shopping for a given auto or mortgage loan within a focused period of time;
- Apply for and open new credit accounts only as needed, and
- Have credit cards, but manage them responsibly.
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