Alina T. Golga
In the market for a mortgage? Experts recommend that it is always a good idea to first look at your credit report to see what your FICO score shows. Sometimes, there are things that can be done to clean up a credit report in a short period of time. However, some actions can actually hurt your credit score. This article will discuss 4 common misconceptions about cleaning up your credit report and boosting your FICO score.
Closing accounts
Closing accounts shrinks your total available credit, one factor taken into account when calculating your FICO score. The FICO score looks at the ratio between available credit and balances outstanding. Unless you reduce your balances outstanding, closing an account will reduce available credit, thereby hurting this ratio and your FICO score.
Another factor in a FICO score is the length of your credit history. Closing old accounts will have the effect of reducing your history and will make you look like the 23 year old with four years of credit. Obviously, this doesn’t help your score.
Closing accounts is almost always bad. Shrinking your balances is good.
Inquiries hurt your credit score
According to the LA Times, one inquiry will generally knock no more than five points off their score. As scores range from 300 to 850, five points is really inconsequential.
Which types of credit inquiries can cost you these five points? Applying for new credit will most certainly cut into your credit score. However, ordering a copy of your own credit report and inquiries from credit card lenders will not affect your score unless you accept their offer of credit.
Several inquiries within a 14 day cycle genarally count as one inquiry says the LA Times. Also, inquiries that are at least 30 days old are usually not taken into consideration when calculating your score.
Credit counseling is as bad as bankruptcy
Some lenders may frown upon the sight of credit counselors while others may indeed view them favorably.
Credit counseling found its way out of the FICO formula several years ago and is now considered neutral to a FICO score.
However, defaulting on your payments or sending them in late does hurt your score. Many credit counseling agencies send in payments late every month, just killing your credit score.
Some lenders treat customers in credit counseling as if they had filed for a Ch.13 bankruptcy. A Ch.13 bankruptcy condenses all of your debt and necessitates a payment schedule for debt repayment. Although these lenders might grant you a loan, they will quote you a higher interest rate.
Contact a credit counselor only as a last resort.
You have only one "FICO" score
In the United States there are three credit bureaus (Equifax, TransUnion, Experian). Each one calculates a "FICO" credit scores for consumers. The scores are calculated by using the software developed by Fair, Isaac and Co. Although the formula is the same, scores differ from agency to agency because each agency collects its own information. Some creditors report to only one agency while others report to all three, some to none at all. Because the date upon which the score is based differs from each bureau, the score can vary as well, sometimes by a significant amount.
Given the differences between the bureaus, it is understandable that even the scores have different names. At Equifax, the FICO score is known as the Beacon credit score. At TransUnion, it is called Empirica. While at Experian it is called the "Experian/ Fair Isaac Risk Model."
It is wise to order reports from all three agencies since lenders take all three scores into consideration. Lenders generally go with the middle score, or average, as they believe it is the best indication of your likeliness to pay your future debts. You should order reports from all three agencies and check for errors before applying for a mortgage loan.
Rather than try to outsmart the FICO scoring system, it is usually wise to follow just a few simple rules to maximize your credit score:
1. Reduce your debt if at all possible, especially credit card debt,
2. Make payments on time, all the time,
3. Obtain your credit report every year or so and correct any errors, and
4. Apply for credit in moderation