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Fact vs. Fiction about Credit Scores
- FICTION : If I check my credit report often, all those “inquiries” will lower my credit score.
FACT: Your personal inquiries are called “soft” inquiries and do not impact your credit score at all. You can check your credit as much as you’d like with no negative impact, as long as you do it through a credit bureau or a company authorized to issue credit reports, such as myFICO.
EXPLANATION: Even though you may see all kinds of inquiries in your credit file, many of them have no bearing on your FICO® score. For instance, your FICO® score doesn’t count your own inquiries, as well as those from existing creditors who are reviewing your account, or lenders trying to offer you “pre-approved” credit.
- FICTION: I pay cash for everything and don’t buy on credit or use credit cards, so my credit score should be excellent.
FACT: Having no credit history or never using credit can have a negative impact on your credit score.
EXPLANATION: It helps your FICO® score to have some history of paying credit obligations on time. Fair Isaac reports that people with no credit cards tend to be higher risk than those who have managed their debts responsibly.
- FICTION : I’m going to close out my old accounts since I’m not using them anymore, and that will improve my credit score.
FACT: You can actually hurt your credit score by closing older, more “seasoned” accounts.
EXPLANATION: Generally speaking, it works in your favor to have older accounts in your credit file because it shows that you have a longer credit history.
- FICTION: The most important factor in my credit score is whether or not I am “maxed out” on my credit cards.
FACT: The single biggest determinant of your credit score is how well you’ve paid your bills on time in the past.
EXPLANATION: Your FICO® score takes into account whether you’ve had late or missed payments, how far past due your bills were, how long ago the late pays occurred, and whether you have any collection items.
- FICTION: My age, race, gender, marital status, income or where I live can impact my credit score.
FACT: None of those factors are taken into consideration at all when your FICO® credit score is determined.
EXPLANATION: Under U.S. law, it is illegal to for credit scoring to take into account race, age, color, nationality, religion, sex or marital status.
Because there is so much misinformation about what goes into your credit score, I thought you’d like to know directly from Fair Isaac how the company comes up with your FICO® score. In short, your credit file is reviewed and certain information about how you’ve managed your credit is statistically analyzed. Ultimately, five different categories are weighted to produce your FICO® score. Here’s the breakdown of those five areas that contribute to your FICO® score:
What a FICO® Score Considers
1. Payment History: Approximately 35% of your score is based on this category.
2. Amounts Owed:About 30% of your score is based on this category.
3. Length of Credit History: Roughly 15% of your score is based on this category.
4. Types of Credit in Use: About 10% of your credit score is based on this category.
5. New Credit: Around 10% of your score is based on this category.
Is Credit Scoring Fair to Minorities?
Critics oppose credit scoring for two reasons. First, some argue that so much data collection intrudes on people’s privacy. Also, some critics say that credit scoring discriminates against minorities. Fair Isaac officials dispute both assertions, especially the concept that credit scoring is unfair to minorities.
“Gender, race and nationality are factors that do not get added into the FICO scores,” said Fair Isaac’s Ryan Sjoblad. “It knows nothing about you, except your credit-paying habits. It’s hard to call it (credit scoring) racist, when it has no idea what your race is.” To be honest, I agree whole-heartedly – and most of you probably know that I’m African American.
Next – Day 4: Order Your FICO® Score (Part 3)
