Credit scores may seem like a straightforward term, but associated with it are many misconceptions. The many myths surrounding credit scores can confuse people. Thus it’s important to understand the basics. Credit scores are nothing more than a gauge of how credit worthy a person is. How this is determined may vary according to who’s assigning the credit score, but most include the basic component factors such as payment history, debt owed, credit history and types of credit. Credit scores can range between 300 and 850.
Let’s start out with the basics. Most people assume there’s just one credit score. The truth is there are at least six different ones. The most popular one that everyone’s heard of is probably the FICO score, published by the Fair Issac Corporation. Equifax uses what’s called BEACON. Transunion’s is called FICO Risk Score and Experian’s is called FICO II. These three should roughly be the same.
One misconception is that you should close credit cards to improve your score. This is a myth. Following this practice may actually hurt your credit score. The reason is because credit bureaus look at an individual’s credit history in determining a person’s credit score. If you have an old card, even if you don’t use it much, this card helps. It establishes that you’ve had experience with managing credit.
A person’s credit limit affects the person’s score. People assume that lowering credit limits will help the score. This is false. Credit bureaus looking a person’s debt utilization ratio. This ratio expresses debt as a percentage of a person’s total available credit. The lower your debt ratio, the more favorable your score will be. keep your debt utilization score between 10% to 20%.
