5 Common Credit Score Myths
Below is a MRR and PLR article in category Finance -> subcategory Credit.
5 Common Credit Score Myths
Your credit score holds a significant impact on your financial well-being. Lenders, landlords, insurers, utility companies, and even employers often consider it. This score, ranging from 300 to 850, is derived from your credit report details.
A recent survey reveals that nearly half of Americans are unsure of how credit scores are calculated or what factors influence them. For instance, if your credit score is 580, you might pay almost three percentage points more in mortgage interest than someone with a score of 720. As an example, consider a $150,000 30-year fixed-rate mortgage. With a top-tier credit score, your monthly payment might be around $890. However, with poor credit, you could be paying over $1,200 for the same loan.
Given the importance of credit scores, understanding their intricacies is vital. Many people still believe in several myths surrounding credit scores. Let's explore five common myths and the truths behind them:
Myth #1: Different Formulas for Different Bureaus
Fact: Equifax, TransUnion, and Experian use different names for their credit scores?""Beacon," "Empirica," and "Experian/Fair Isaac Risk Model," respectively. However, they all utilize the same formula. Variations in scores arise because each bureau might have different information in your file. For example, one bureau might have older or more extensive data. Lenders often consider the middle score, so it’s wise to correct any errors at all three bureaus.
Myth #2: Paying Off Debts Instantly Repairs Your Score
Fact: While paying off debts positively affects your score, historical performance weighs more heavily. If you have a history of late or missed payments, improvement takes time even after settling debts. Therefore, make it a habit to pay bills on time while reducing your debt.
Myth #3: Closing Old Accounts Improves Your Score
Fact: Closing accounts doesn’t necessarily boost your score. In fact, it can hurt it. Your score is affected by your credit utilization ratio?"the credit you're using versus what’s available. Closing accounts reduces your available credit, making your existing balances appear larger. Additionally, closing old accounts shortens your credit history, which can also negatively impact your score. It’s usually best to keep accounts open unless a lender specifically requests closure.
Myth #4: Loan Shopping Hurts Your Credit
Fact: Inquiries by lenders can drop your score slightly, but multiple inquiries for the same loan type within 45 days are treated as one. Shop around for loans within this window to avoid unnecessary impacts on your credit score.
Myth #5: Companies Can Quickly Fix Your Credit for a Fee
Fact: If your credit report is accurate, there’s no shortcut to improving your score without demonstrating responsible debt management over time. If there are errors, you can contact the credit bureaus yourself without paying a third party. Each bureau's website provides guidance on correcting errors.
Improving Your Credit Score
Focus on these strategies for a better credit score: reduce your debt, pay bills promptly, correct errors on your credit reports, and limit new credit applications.
Understanding the reality behind these myths can empower you to make informed financial decisions and improve your credit score over time.
You can find the original non-AI version of this article here: 5 Common Credit Score Myths.
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