We like to say that to the unfamiliar, reading credit reports is like trying to navigate in a foreign country with a map in a language you don’t know. If that’s true, figuring out credit scores for most people probably feels like trying to find their way around that same foreign country with nothing other than latitude and longitude coordinates.
But have no fear, below are several pointers for steering yourself in the right direction.
The myth- If you are applying for a large loan like a car or mortgage and want to lower your revolving utilization percentage to raise your score, simply pay down your revolving balances and then apply for the loan shortly thereafter.
The reality- The FICO scoring model looks at your balances on revolving accounts the last time a balance was reported by the lender. In other words, if you have high revolving balance, you would need to pay those down and then wait until another reporting cycle had finished to report your new low balance.
The myth- Having too many inquiries is a leading cause of low credit scores.
The reality- FICO has said that less than 4% of the population has had their score lowered by 20% or more because of inquiries and that in most cases a high number of inquiries only brings down the score by 5 points or less.
The myth- Utilizing a Debt Management Plan to repay debts bring down your FICO score.
The reality- FICO has commented that participating in a DMP does not inherently bring down the score.
The myth- You can have as many credit cards as you want without it impacting your score.
The reality- If you have more than 4 credit cards, it can bring down your FICO score.
The myth- Having large student loan debt hurts your credit score.
The reality- FICO has said that the amount of your student loans doesn’t negatively impact your score.
The myth- Refinancing a home will always hurt your FICO score.
The reality- A refinance shouldn’t affect your credit much unless a new account is opened instead of continuing with the old one.
The myth- The best use of credit card to maximize your FICO score is to always have a $0 balance on the card.
The reality- According to FICO, their scoring model rewards activity on the account. This doesn’t mean you have to make a lot of charges, or charge large amounts, but rather that 1 charge per month is better than 0.