Credit scoring myths -- and the facts

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I should close a credit card account I don't use. Probably not. Closing a card account means you don't have access to that credit anymore. And, again, lowering the amount of your available credit is detrimental.

If you had the credit card for a long time, closing it hurts even more because scoring formulas consider how old your accounts are, with older accounts being better because they have long payment track records. There's no harm in leaving card accounts open even if you don't use the cards, unless they charge an annual fee.

However, if a credit card account is relatively new — just a few years old — and has a relatively low credit limit, closing it won't matter much. And spendthrifts might close the account anyway if they can't stop themselves from discretionary shopping when they have any available credit.

There is one true credit score. In fact, you have many scores. There are different brands of scores — FICO is most used, but many others are available to lenders. And then there are scores tailored to the type of loan you're applying for. The formula for mortgage credit scores is different than for auto-loan scores.

“You could have as many as 120 active credit scores,” Levin said.

Just as troublesome is that the scores consumers can access aren't necessarily the same ones lenders use.

Ultimately, what you can control is the information on your credit reports, which are the basis for all scores.

Rich people have higher credit scores. In fact, income has nothing to do with credit. It's not a factor in credit-scoring formulas. A billionaire who pays cash for everything and uses no credit is likely to have a worse score than a billionaire's butler who has many credit accounts and uses them responsibly.

“Your income level has nothing to do with your credit score,” Levin said. Similarly, your ZIP code has nothing to do with your credit rating.

gkarp@tribune.com

Some seemingly false perceptions about credit are actually true or close to it.

Your credit affects your insurance premiums. Wacky-sounding but true. Though there doesn't seem to be a relation between your credit use and whether you're involved in a car crash, some auto insurance companies consider your credit scores in determining insurance premiums. They insist there is a correlation between a consumer's credit and the claims he or she is likely to file.

Employers check your credit scores. Employers don't check scores, but they might look at your credit reports, which is the only thing you can control anyway.

Visiting a credit counselor hurts your credit. Using a debt counselor and getting advice doesn't hurt your credit. However, if you end up allowing a counselor to negotiate settlements with creditors — paying them less than you owe — that will hurt your credit, Levin said. That doesn't mean you shouldn't see a debt counselor, however. Most people considering debt help have lousy credit scores anyway.

 

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