Myths Worth Sharing!

     Your score is an integral part of your financial life. It is important that you understand what it's all about. Lenders, landlords, insurers, utility companies and even employers look at your scores. It is derived from what's in your reports, and it ranges between 300 and 850 on FICO.

      Yet, according to a survey that was recently conducted, nearly half of all Americans don't know how these scores are derived or even what factors are used to come up with them: For example, if your score is 580 you are probably going to pay nearly three percentage points more in mortgage interest than someone who had a score of 720.

      Or another way of looking at it, if you had a $150,000 30- year fixed-rate mortgage and your score was good enough to qualify for the best rate, your monthly payments would be about $890. This is according to Fair Isaac, the company that created the FICO score and who the rate is named after (Fair Isaac Corporation). If your score is poor, however, it is very likely that you would have to pay more than $1,200 a month for that same loan.

      With so much depending on your score, it’s important to understand what it is all about and what are the things that affect it. Unfortunately, people commonly have a lot of misinformation and misunderstandings about their score. Here are three of the most common score myths and along with it the true facts:

MYTH #1: The major bureaus use different formulas for calculating your score.

FACT: The three major bureaus - Equifax, TransUnion and Experian -- give the score a different name. Equifax calls their score the "Beacon" score, Transunion calls it "Empirica" and Experian gives it the name "Experian/Fair Isaac Risk Model." They all use different names for the scores, but they all use the same formula to come up with it.

      The reason that the score you receive from each bureau is different is because the information in your file that they base the score on is different. For example,the records that one bureau is using may go back a longer period of time, or a previous lender may have shared its information with only one of the bureaus and not the other two.

      Usually the scores are not too far from each other. Unless there is a big difference between what each bureau says is your  score, many lenders will just use the one in the middle for the purpose of analyzing your application. So, for this reason alone it is a good idea to correct any errors that exist in each of the three major bureaus.

MYTH #2: Paying off your debts is all you need to do to immediately repair your score.

FACT: Your score is mostly determined by your past performance more than your current amount of debt. It will definitely be very helpful to pay off your cards and settle any outstanding loans, but if yours is a history of late or missed payments, it won’t remove the damage overnight. It takes time to repair your score.

So definitely pay down your debts, but be careful to ensure accuracy before paying collection accounts. It is equally important to consistently get in the habit of paying your bills on time.

MYTH #3: Closing old accounts will boost my score.

FACT: This is a common misconception. It's not closing accounts that affects your score, it's opening them. Closing accounts can never help your score, and may actually hurt it. Yes, having too many open accounts does hurt your score. But once the accounts have been opened,the damage has already been done. Shutting the account doesn’t repair it and it may actually make things worse.

The score is affected by the difference between the that is available and the credit that is being used. Shutting down accounts reduces the amount of total credit available and when compared with how much credit you can use your actual credit balances are made to seem larger. This hurts your credit score.

The score also looks at the length of your history. Shutting older accounts removes old history and can make your history look younger than it actually is. This also can hurt your score.

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