August 14th, 2008
Eating Ice Cream Will Lower Your Credit Score
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.
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There are several different types of credit scores. Which one does Credit Karma provide?
In response to Tom, I’ve heard that Credit Karma provides their own calculation of the FICO, which some people claim to be quite close to the true FICO, while others claim it’s not that close.
Anyway, thank you for clearing up a lot of misconceptions in the post above. I’ve heard a lot of similar concerns, and if somebody doesn’t know the much about credit and credit reports, then it can be a very intimidating subject. I mean, until you really dive in and learn the truth, you have no way to know who knows what they’re talking about and who doesn’t. I’ve heard so many people experienced in “life” who don’t know the first thing about credit, but they’ll be the first to throw out advice. (usually wrong)
Very interesting to note that an increase in your income generally doesn’t affect your credit score.
Mmmm, ice cream.