5 Credit Score Myths

The calculations used by Fair Isaac & Co. (FICO) are designed to turn your credit worthiness into a number. Credit scores range from 300 to 850. If you are considered credit worthy, your credit score will be high. If you are considered high risk, your credit score will be low.

Generally speaking, a credit score of 650 - 720 is good, a credit score above 720 is excellent, and any score below 620 is considered high risk.

According to Experian's National Score Index, the national average credit score is 693.

Below are five common myths regarding credit scores.

Myth 1: Higher income helps my credit

False

There are some who believe the higher your income, the higher your credit score. However, your income is not used to calculate your credit score. Banks and other lenders will look at your debt to income ratio to decide whether or not they want to lend you money, but high income does not equal a good credit score.

Myth 2: Closing old accounts will help your credit.

False

As Craig Watts, an executive at Fair Isaac & Co. states, "Closing accounts can never help your score, and often it can hurt."

If you have old accounts you don't use, canceling those accounts will not improve your credit score. In fact the older accounts give you a longer credit history. Longer, more substantiated credit histories will usually give you a stronger credit score than shorter credit history. This of course depends on whether you have a good repayment history or a poor repayment history. Shorter good payment histories will be better than longer poor payment histories.

If you really feel you need to close accounts, you would be better to close newer accounts.

3: Having open accounts with lots of available credit will hurt your credit score

False

According to Maxine Sweet, Vice President of Public Education for Experian: "The total of the balances you carry is the most important. High balances as compared to the available limits is a strong sign of credit risk. Having unused cards can actually help in this situation."

Keep in mind, even though open and available credit will not hurt your credit score, high credit availability may be viewed negatively by lenders. Their concern will be your ability to accumulate debt quickly, making it more difficult for you to make your payments on time.

Myth 4:

Having your credit checked many times while shopping for a car or while contemplating another major purchase will hurt your credit score.

False

Credit scoring companies realize that intelligent shoppers will apply to various lending institutions to find the best loan possible. Since this is the case, multiple credit checks in a short period of time, usually 14 days, will not negatively affect your credit score.

Myth 5:

If you choose to pay cash for everything until you are ready to purchase a home, you won't have a credit history, and no one will give approve you for a home loan.

False

Fair Isaac and other credit reporting bureaus like PayRentBuildCredit, have created new methods to calculate credit worthiness for cash paying customers. These companies will offer credit scores based on payments to utility companies, bank deposit histories, renter payment histories, purchase payment plans and others.

Another example is ChexSystems. ChexSystems is a reporting company that uses collected banking data to calculate credit worthiness.

These credit reporting agencies can be used by mortgage lenders to check your credit worthiness.

For more finance help and education visit http://www.myfinancialuniversity.com/finance

Written by: Robert Ratliff