3 Myths About Your Credit Score
Though odd and often fascinating, most old wives’ tales are fairly harmless. You probably remember your mother saying, “Don’t cross your eyes, they’ll get stuck that way,” or offering a stern warning about such dangers as getting warts from a frog. And who among us doesn’t “knock on wood” every now and then to avoid the dreaded jinx?
But warts and wood-knocking aside, some age-old myths actually can harm you —and your finances. In fact, several myths about credit scores are so widespread, they seem like common knowledge. Unfortunately, many people continue to act on these misconceptions, making what they believe to be sound financial decisions in the interest of protecting or even boosting their credit score. Instead, they ultimately can hurt their chances of being approved for a credit card, mortgage, or even a new job or apartment.
What’s in a FICO® Score?
Credit scores like the one most commonly used, called FICO—short for Fair Isaac Corporation, the company that created and computes the score —represent nothing more than a number that results from a formula that crunches data from your credit history. These days, FICO is more open in sharing information on the five categories of data they calculate, and how much each is worth to your score: With that in mind, let’s debunk some of the most widespread myths.
Myth #1: Closing old accounts boosts your score
In certain circumstances, closing an old account can be a good idea —say, after a divorce or if you have too many accounts. But in general, closing an old account—particularly one with a lengthy history of being in good standing—will actually hurt your score for two reasons.
First, 15% of your score is determined by the length of your credit history, so closing older accounts while leaving newer ones open actually shortens your credit history. Second, 30% of your score is determined by the amounts you owe, which includes a measure of your “credit utilization”—the percentage of your overall credit that’s actually being used. Closing accounts can actually increase your utilization.
For example, say you have a balance of $500 with a total of $10,000 of available credit, which works out to 5% utilization (500/10,000). Closing an old account with a $5,000 limit means you now have a $500 balance with only $5,000 of available credit, effectively doubling your utilization to 10% (500/5,000).
Myth #2: Opening new accounts helps your score
Opening a slew of new accounts just to increase your overall credit limit and decrease the “credit utilization” portion of your score can also backfire. That’s because another 10% of your score is determined by new credit, which includes the number of recently opened accounts as well as the proportion of all accounts that are recently opened. And, of course, more new accounts lessen your average account age which in turn affects your length of credit history. The best strategy is to apply for and open new credit accounts only when needed.
Myth #3: Checking your own credit report hurts your score
The only credit inquiries that can affect your score are those that result from applying for new credit. Though they may appear on your credit report, inquiries from potential employers and from insurers or credit card companies seeking to determine whether you qualify for pre-approval or a prescreened offer do not affect your score. Checking your own credit report doesn’t affect your score either, as long as you order it directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers. (Order your free credit report annually from AnnualCreditReport.com.) In fact, the opposite could be true: If you neglect to check your credit report regularly, errors and fraud that affect your score can go undetected and harm your ability to get credit when you need it.