The holiday shopping season is in full swing and many consumers are using their credit cards online and in stores. This begs the question: How will my credit score be affected by rising balances? And what are the other big factors that can lower or raise my score?
Chase has provided a very informative post on the top myths and misconceptions about credit scores.
For her post, Chase’s Farnoosh Torabi consulted with Ethan Dornhelm, senior principal scientist at FICO, the company behind the FICO credit score used in more than 90 percent of lending decisions. Chase is one of a growing number of credit card providers offering free FICO credit scores.
Here are the top credit score myths:
Myth #1: The Higher Your income the Better Your Score
“We get a lot of people asking, ‘Why is my FICO® Score low? I make great income,’ ” says Dornhelm. “There’s this impression that somehow anything that makes you seem ‘credit worthy’ would factor well into your FICO Score, but income is not included in credit reports, so it has no impact on your score.”
Lenders will sometimes ask your income when reviewing your loan application — and certainly a higher income may work in your favor — but your credit score doesn’t factor in your salary. FICO Scores are based solely on information listed on your credit report, such as your credit history and new accounts.
Myth #2: Carrying a Balance Will Improve Your Score
Another common myth has to do with carrying a monthly balance on credit card in order to achieve a high credit rating.
This is a falsehood that seems to linger. Dornhelm says he has heard this myth time and time again. Some people say they carry a bigger balance than necessary in hopes of showing they’re able to “manage” and “use” credit.
Ideally, you should pay off your credit card monthly or pay off as much as you can. Measures of your debt burden, such as the share of your available credit that you’re using – make up roughly 30 percent of your FICO Score. The lower your debt-to-credit ratio – which is your total credit-card debt divided by the total of your credit limits — the better it can be for your score. In fact, FICO says the average debt-to-credit ratio for “FICO High Achievers” is roughly 7 percent.
Myth #3: Closing My Card Account Will Erase Its History
When you close an account, it doesn’t fall off your credit report. “Plenty of your closed accounts show up and tend to show up for many years to come,” Dornhelm says.
That’s actually good news. While closing an account diminishes your available credit (which could increase that debt-to-credit ratio discussed above), it doesn’t erase the fact that you’ve had that card since, say, 2005 or the first day of college. The length of your credit history remains on your report for several years even after the account is closed. And that’s good, since credit history length comprises about 10% of your score. The longer your history, the better for your score.
Myth #4: Employers Can Check My Credit Score
The media gets this one wrong from time to time, causing confusion. But, the truth is that, with your permission, an employer can pull a credit report but not a credit score. And that credit report review is considered a “soft” inquiry, vs. a “hard” one from a potential lender. Those hard inquiries can affect your credit score if they signal that you’re looking in many places for new loans.
Myth #5: All FICO Scores Are Created Equal
Why is it that you might receive a credit score of, say, 754 directly from FICO while a lender says your score is 748?
Not all FICO Scores are the same, because there are multiple versions of it for different kinds of loans. “Generally speaking, they tend to be relatively consistent and similar but you may notice subtle differences,” says Dornhelm. For example, explains Dornhelm, “the FICO Auto Score may look more closely at your auto loan repayment history. There are some slight nuances [in the calculation.]”
In addition, FICO Scores are based on the records of a credit bureau, and different bureaus may have slightly different information about you, depending on what was reported to them by creditors and any changes or corrections you have requested.