The other day I was talking to a friend in the loan/credit department of the credit union that so graciously pays my salary and the topic of conversation turned to a member who had applied for our best fixed-rate credit card. He had a strong enough credit score and made plenty of money but he was denied. Why? Lack of overall credit history. And here I thought all you needed was a good score to get a credit card. So I added that to my running list of credit score myths, which includes the following five…

1. There is only one credit score out there

Wrongamundo.There are three major credit bureaus, Experian, Equifax, and TransUnion, each with multiple scoring models, including FICO and others. Also, all three bureaus may not receive exactly the same data in you credit report-the number of accounts you have open, the current balance of those accounts, whether or not you’ve defaulted on any of the terms and conditions of those accounts, and so on. So in all actuality there are lots of different scores out there, although all of them will be highly correlated.

2. Checking your score will make it lower

Negative, ghost-rider. You can check your credit score all you want; it won’t do a darn thing to it. And you know those pre-approval notices you get for credit cards and auto loans every now and again? Those won’t affect your score either, despite the fact that the lender is obviously pinging your score to se if you qualify. If that type of action did affect scores we’d have a whole lot of angry callers at the credit union.

3. Your income can change your score

Bzzzz, sorry, but thanks for playing. You could go from making 10 bucks an hour to a bazillion dollars a year (a number so high it doesn’t even exist) and it won’t affect your score. Of course, having a bunch of money will likely make it easier to qualify for certain loans and pay them on time, hence allowing you to build credit you might not have otherwise received, but on a very basic level your income does nothing to your credit score.

4. Shopping for a loan will hurt your score

If this were a math problem, you’d get partial credit. It’s not a good idea to shop around for several different types of loans at a time because that says to the credit bureaus, “Mr. Smith (that’s you) is frantically looking for money wherever he can get it, something must be wrong!” But let’s say you are looking for a home loan and you apply at four different banks within a 14-day period. That would only be considered a single inquiry on your credit report and your score will not be affected. Beware of applying for too many credit cards at one time, however, as those do not fit into the 14-day rule and will all be counted as separate inquiries.

5. Closing some accounts will improve your score

For the love of no and all that is wrongy (I’m totally reaching on that one), please don’t go closing out accounts because you think it will help your score. It might end up doing just the opposite for two main reasons:

One, your total credit limit vs. your total debt. For example, if you have three credit cards with $5,000 limits each and you carry a total balance of $4,000 on two of them, you’re using approximately 27% of your total credit. Close the card with no balance and you’re down to a limit of $10,000 with the same $4,000 outstanding, meaning you’re now using 40% of your available credit. That may lower your score.

The other possible problem would occur if that card you closed was the oldest form of credit you had, because then your credit history would appear shorter and that too could negatively affect your score.

So hopefully this list has cleared up a few of the misconceptions you may have had about credit scores. I too used to think several of them true just because someone, somewhere, had been given the wrong information and was passing it along. Glad I’m now able to pass on the right information to you instead.

At Credit Karma, we want to give our users access, information, and leverage. We read everyday about the importance of credit but I don’t think we do a very good job quantifying it. Last Friday, I called up a friend at E-LOAN and asked about the best rates for a 650 credit score versus a 600 credit score mortgage rate. For the 650 borrower, the best rate was 6.75% with no points. For the 600 borrower, the best rate was 8.75% with 3 points.

Assuming a $250,000 mortgage and using our mortgage calculator, you will see that the 600 borrower will pay over  $93,000 more over the life of the loan in interest and will have to pay an additional $7,500 in closing costs. That means, a mere 50 point difference in credit score can cost upwards of $100,000. The difference is obviously higher if you have a larger mortgage assuming you can get the loan. To me, this makes credit the most important number in your financial health more than your SSN, credit card number, or even the balance in your bank account.

With this in mind, I suggest that you keep an eye on your credit score. You know better than anyone when you will have a major purchase. So when you plan your next big purchase (mortgage, car, etc.) , be diligent about knowing your score. Check it once a month and make sure you know the factors that make it go up and down. Remember that good credit takes years to build only only a few missed payments to destroy. Given the costs associated with credit, it can be the most expensive mistake of your life.

We get asked this question quite often. Technically, it can change any point your credit report changes. Any of the following can trigger a credit score change:

1. Missing a Payment
2. Applying for a New Loan or Credit Card
3. Changing Your Available Credit
4. Defaulting on a Loan or Charging Off
5. Bankruptcy
6. The List Goes On……

But some people have asked why their score has not changed in months. Well, my score hasn’t changed since we launched the service in Feb, 2008 until just this week. As background:

* I have a mortgage
* I don’t carry any balance on my credit cards
* I’ve had a good payment history for over 15 years
* I don’t apply for credit often

A few days ago, I decided to apply for one of the Gas credit cards I wrote about. I then updated my credit score the next day. My score dropped 6 points from the inquiry. I’m sure it will change again when the credit card provider reports my credit line and utilization to the bureaus. I suspect it will jump back up since I won’t carry a balance and it will increase my total available credit.

I’m writing this to let users know that your score shouldn’t be constantly changing if you are stable with your finances and credit. I’ve had the same score for over 3 months so don’t be concerned if your score isn’t jumping around. Part of the service is built to instill a sense of comfort and familiarity with your score.

On a daily basis, we get several emails and questions about why a consumer’s score is different from their other score(s). These questions and confusions on credit are exactly why we developed Credit Karma. To properly answer the question, there are five things that consumers should keep in mind.

1. There are three different credit bureau: Equifax, Experian, and TransUnion. Each credit score is developed with data from one of those bureaus, and each bureau may have slightly different information about a user.  A majority of the information will be consistent, but the bureau used can lead to differences in scores.
2. There are different brands of scores. FICO is probably the best known of the brands of scores, but FICO is analogous to Kleenex for tissue. It’s just the brand name; there are several other tissues that do the same thing. To say one is better to the average consumer is a function of their marketing and brand building. All credit scores are built from the same underlying bureau data using the same mathematical process.
3. There are hundreds of credit scoring algorithms (formulas). Some credit scores predict mortgage default, others auto loan default, and some are for people with short credit history. Even within FICO, there are several different scores for different purposes.
4. Credit Scores can change at any time. A score technically changes anytime the credit data files that drive it changes. Since a bureau can update your credit report at any time, your score can change at any given point.
5. All credit scores are highly correlated (related). A movement within one score or bureau will often be indicative of all other scores. It’s a natural behavior of statistics and how these credit scoring algorithms are built.

For our users, we recognized that all of this information is both confusing and annoying. If you take points 1-4, there are an infinite number scores for any given consumer. To address the problem, we decided to provide one consistent benchmark into user scores. That means we use the same bureau and same algorithm. Everything is the same but time and the information on your credit file. The idea is that if your Credit Karma score changes, it means something in your file changed and your other scores probably changed as well.

I hope this is useful for our users that ask why their scores are different. Let us know what you think with comments below.

If you have ever wondered if age affects credit scores, the answer is yes. Based on our data, we analyzed the relationship between age and average credit score for a sample of Credit Karma users. The relationship is quite clear that age is positively correlated to credit score. The older an individual, the higher their credit score on average.

In statistics, it is always important to recognize that correlation does not imply causality. In this case, age does cause changes in score. Most credit scoring algorithms take into account the length of your credit history and trade lines. The longer your trade lines are in good standing, the better your score. It therefore makes sense that younger people will have younger trade lines and therefore lower credit scores on average. The rationale is simple: the longer you have maintained a credit line in good standing, the higher demonstrated level of responsibility and therefore lower risk.

It is also import to note that younger people may have few accounts as well. The breadth of credit lines is another factor in score. This is not to say that someone 18-24 can’t have a high credit score. There are many factors affect your credit but on average a younger person will have a lower score.

The other plausible factor is that older people tend to be more responsible. For the same reason that drivers over 25 get a discount in their auto insurance, I suspect that older individuals tend be more responsible in their financial behavior and therefore would have higher scores as well. This is more a personal theory. Perhaps this can be the topic of future analysis based on our data.

Share your thoughts.

Disclaimer: This data is based upon a sample of Credit Karma users and may not be indicative of national averages or trends.