Debt and Your Credit: Five Common Myths About Credit

Myth #1: Different formulas are used for calculating your credit score by the three major credit reporting bureaus.

Not so, each has a different name: Equifax calls it “Beacon”, Trans Union calls it “Empirica”, and Experian calls it “Fair Isaac Risk Model” (FICO), but they all use the same formula. The reason the scores are different depends on the information they have in your file. One Bureau may have information that goes back farther, or a lender reported your payment history or other information to only one of the three bureaus.

Myth #2: To immediately fix your credit score just pay off your debts.

Unfortunately this is a very big misconception. Your score is determined by your past payment history, not the current amount of debts. So if you have a history of late or missed payments, paying off your debts will not improve your score. There is no overnight fix to repair your score, it takes time. It’s important not only to pay down your debts, but also to pay your bills consistently and on time.

Myth #3: Your credit score will improve if you close your accounts

This is a big misconception. What does affect your score is opening new accounts rather than closing older ones. As a matter of fact closing accounts could actually hurt your score. On the other hand, having too many open accounts also has a negative impact on your score; but once opened the damage has been done.

Myth #4: Shopping around for a loan will hurt your credit score.

This is not necessarily true. However, bear in mind each time a lender makes an inquiry into your credit your score could drop up to five points. Most people think that by going to different lenders their credit score will drop because each lender requests a credit report. While this is true, here’s the good news. There is a 45 day window where multiple inquiries from lenders are treated as a single inquiry. So if you plan to shop around for a loan make sure you do it within those 45 days.

OR… Play it safe. What would be better is to get your own copy from all three credit bureaus then ask the lender which credit bureau they use. Now you have a copy to give them and you will know which one scores the highest and therefore which lenders to go to. If the lender uses the bureau with the lowest score, move on. Lenders recognize a report/score for up to six months and will not pull a new one if you are within those six months.

Myth #5: There are companies out there that can fix my credit score as long as I pay a fee.

There are many companies out there who claim to be able to do this. However, this involves working with your credit report, which your credit score is a direct result of. If you have a history of not handling your debts well there is really nothing that can be done quickly. The only effect on your credit score is to show that you can manage your debts, which takes time. The same amount of time that companies need to fix a credit score. You can do this yourself without a fee.

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