When it comes to credit scores, there’s a lot of conflicting information out there. Check out these little-known facts to keep you informed.
1. There are several types of credit scores
The phrase “credit score” is an overarching term used to describe how likely you are to pay your bills on time. There are several different scoring models that determine your creditworthiness.
You’ve probably heard about the FICO score, which is the most popular scoring model. However, there are different versions of FICO scores, with some of them being industry-specific. For example, an auto lender will look at your FICO Auto Score when getting you approved for a new car. For purchasing or refinancing a home, mortgage lenders will look at different versions of your FICO scores across all three of the major credit bureaus.
Not only are there several versions of FICO scores, but there are also new scoring models coming out throughout the years, such as the VantageScore. Trying to understand all the different types of credit scores can get confusing. Overall, it’s better to focus on good credit behaviors across all your financial activity.
2. Sometimes a dispute isn’t a good idea
Here’s where things get a little controversial. On the one hand, checking your credit history for errors is crucial for maintaining a healthy credit score. But in some cases, fixing your credit report right away may not be helpful.
When you report an error, a credit dispute notice is placed on your report until the original entry is either verified as accurate or corrected. If you disagree with their finding, the credit agency will put another dispute notation on the report while the process starts over.
But when you’re applying for a mortgage, a dispute notation will probably cause the loan to be sent to manual underwriting (a longer process) or even denied. Fixing the error may not be worth the risk of having a notification linger on your report.
If you’re in the process of applying for a loan and notice a mistake on your report, make sure to consult with your lender before taking any action.
3. Paying off collections won’t boost your score
If you’re in the process of applying for a home loan, and you notice a delinquent balance from a couple of years ago, you should immediately pay it off, right? Actually, no! While paying off an old bill that you missed seems like the right thing to do, that recent activity could raise a red flag to underwriters. If an unexpected item comes up on your credit report, you should consult with your lender before taking action.
To maintain a healthy score, you want to prevent any bills from going to collections. Letting a delinquent bill go to collections can hurt your score, but paying that bill won’t raise your score. If you find out about an old balance that has already been sent to collections, you may want to consult with your lender or a credit repair specialist before paying it.
4. Messing with your credit limit can lower your score
A lot of people focus more on the debt rather than their total available credit balance. But an important factor that impacts your credit score is the credit utilization ratio. Your credit utilization is the total amount of debt that you owe, divided by your total available credit balance.
For example, let’s say you have two credit cards with a combined $100 in debt, but your total credit limit for those two cards is only $200. This makes your credit utilization ratio 50%.
Someone with the same credit card debt of $100 but a credit limit of $1,000 has a credit utilization of 10%.
To maintain a healthy credit score, you want to keep your credit utilization low, preferably between 10% to 30%. Closing unused credit cards can lower your total credit limit, which raises your credit utilization and hurts your score.
5. Negative info can remain on your report for several years
When it comes to negative information on your credit score, prevention is key. Unfortunately, paying off collections doesn’t immediately wipe it from your report. Late payments can stay on your report for seven years. Thankfully, all negative credit events eventually will fall off your report.
If you have problems with your credit history, it’s best to focus on the things you can control to positively impact your score. Working with a reputable credit repair specialist can help you overcome these issues and create a game plan for improving (and maintaining) your credit.