Credit Score Myths

Your credit score is a number between 300 and 850 based on your credit information in your credit report. The exact calculations that determine your credit score are kept secret and the three major credit bureaus (Equifax, Experian and Transunion) use slightly different methods to determine your credit score. Although they are all based on similar information, your creditors may not report your credit activity to all three bureaus. As a result, there can be inconsistencies.

Even though the exact calculations for determining your credit score are not public, there is information you can learn to help increase your credit score in the long run. The challenge is to separate this information from the misinformation that’s out there.

Here are 4 major credit myths and the truth behind them:

1. Requesting your credit report will lower your score.
Whenever you request to see your credit report, which directly determines your credit score, this is known as an inquiry. There are two types of inquires- hard and soft. A soft inquiry is when you check your own report, or when credit card companies look at your report before pre-approving you for credit card solicitations. This will not adversely affect your credit.

Hard inquires occur when you apply for loan and lenders look at your credit report to determine your credit risk. Multiple hard inquires can potentially decrease your credit score because they are seen as shopping around for credit. It can be interpreted that multiple lenders will not approve you for a loan. If you know you will have several hard inquiries on your credit report, (say you’re shopping around for the best mortgage) do it all at once, because inquiries made in a concentrated period of time can count as a single inquiry.


2. Closing accounts will raise your credit score.
Not opening unnecessary accounts in the first place would have kept your score higher. Once the damage is done, closing the accounts won’t help. In fact, because the length of your credit history is one of the factors that determine your credit score, closing old accounts can have a negative impact on your credit score. You would be better off having more moderate balances on a few different cards than only one maxed-out card.


3. Once you pay off a debt, it’s gone from your credit record.
It would be nice if a history of late payments would disappear as soon as the debt was fully paid off. Unfortunately, it doesn’t work that way. Negative marks, like late payments, will remain on your report for up to seven years. However, recent behavior counts more than past behavior. If you’ve had a good payment history for the past year, it can outweigh many past transgressions.


4. If you get a credit card and make regular payments, you'll have good credit.
This is one of the few things you can do to raise your credit score. But it certainly isn’t the whole picture. Your score depends on your credit history, your payment history, what types of credit you have, and your outstanding debts.