The Wall Street Journal recently published an article titled “9 myths about credit scores.” Knowing what actions truly impact your credit score is crucial if you are working on improving your credit score. A higher score can mean better terms on credit cards, lower mortgage rates and less expensive premiums on insurance (to name a few).
With these things in mind, let’s discuss a few of the myths the article outlines.
There are two types of inquiries on your score. The first is a hard inquiry, in which a financial firm is considering extending you credit or offering you a loan. Secondly, a soft inquiry typically occurs when a person or company checks your credit as part of a background check. For example, your employer might run a soft inquiry before hiring you or a landlord may check your score before renting to you. These pulls don’t affect your credit score. When you seek information about your own score, this is a soft inquiry. Doing a self-check on your score can empower you to take charge of your credit and is strongly encouraged. Both of the leading scoring models, FICO and VantageScore are available for free. Many credit card companies also include monthly credit score monitoring if you have a credit card with them.
Sometimes the first credit cards we open, when our credit profiles aren’t well established, have higher interest rates than a card we qualify for as our credit matures. People may assume that if you close a credit card account it will help boost a credit score. So, they close the cards with higher interest rates first and keep the ones with the lower rates. But the truth is that closing an older account won’t help your score, and it might actually hurt.
Credit Karma recommends paying off any higher interest credit cards and then keeping them open, either with an occasional charge you quickly pay off or by putting a small monthly subscription charge onto the card and autopay it. This helps with the longevity of your credit. Make sure the card does not have an annual fee and if it does, ask the cardholder to switch you to a fee-free product.
Many consumers are unaware of what all is listed in their credit report. According to a study by the Federal Trade Commission in 2012, 21% of consumers found errors in their credit that resulted in modifications by the credit reporting firms. The best way to deal with credit mistakes is to catch them early by regularly looking at your credit report. You are entitled to a free copy of your credit report annually from each of the three credit reporting companies (TransUnion, Experian and Equifax). You can request them at Annualcreditreport.com or by calling 1-877-322-8228. Put a reminder on your calendar for once every four months and stagger your requests for each firm. This way you can keep an eye on your credit all year long. This article from Bankrate explains how to keep your credit score in good standing.
Finally, here are a list of actions and how they impact your credit score.
|Consumer Action||Lender Interpretation||Impact on Credit Score|
|Pay bills on time||Consumer is handling debt wisely||Improves your score|
|Has low credit utilization||Has sufficient access to credit||Improves your score|
|Has inquiry about new loan||Why the need for credit?||Small drop in your score|
|Takes out a new loan||Why the need for credit?||Small drop in your score|
|Maxes out credit card||Potential for significant exposure||Drop in score|
|Pays late (first time)||Potential for significant exposure||Drop in score|
|Pays multiple loans late||All credit at risk||Larger score drop|
|Charge off (lender takes a loss)||Default||Major score drop|
|Foreclosure||Default||Major score drop|