Myths about credit scores
KYLE SMITH

In this day and age of banks and lending institutions tightening up on their lending practices and looking for slightly higher credit scores than in the past, a timely topic to revisit is that of what does and doesn't directly affect your score. If you are a small business owner, or are thinking about starting your own business, or even entertaining the idea of purchasing a home, these same principles and practices would apply also.

Myth No. 1 - Closing charge or credit card accounts will improve my credit score.

WRONG!! The truth is that closing accounts will never help your credit score, and in fact, may hurt it. Once an account or accounts has/have been open(ed), the potential for damage is already there - closing it won't undo the damage.

Your credit score actually is a measure of the difference between your available credit and what you are using. Closing accounts results in a reduction of your total available credit, thus increasing the ratio of balance between actual and available, typically negatively impacting your score.

Your credit score also tracks the length of your credit history. When older accounts are closed, it can make your credit history appear "younger" than it really is, which in turn can hurt your score.

A better alternative to closing accounts would be to pay down your credit card debt. You can look at this as the reverse of investments, rather than being able to make a paltry 2 to 3 percent on bonds or funds of some sort, how about being able to "save" paying an additional 18 percent interest? (If you were looking for a sale when you were shopping, is a savings of 18-20% an attractive option on an item or items that you plan to buy?)

Myth No. 2 - Checking your FICO score can hurt your credit. Applying for new credit is actually what can reduce your score. Ordering a copy of your own credit report or score doesn't count. Mass inquiries by credit card lenders won't hurt you either - unless you accept their offer(s)!

The FICO score assumes multiple inquiries in a 45-day period as just one inquiry, and disregards all inquiries made 30 days prior to the day your score is calculated. As an aside, one inquiry usually doesn't knock more than 5 points off of a score (with total scores generally running from 300 to 850, so the percent to the total is minimal).

Myth No. 3 - Credit counseling reflects negatively on your score as much as a bankruptcy.

Over the last three years, the FICO formula has ignored any reference to credit counseling that may appear in your report, after researchers at Fair, Isaac (the originator of the FICO scoring system) observed that people who actively participated in credit counseling didn't default on their loans/debts any more often that those who didn't attend training, and in fact, were taking some responsibility for their actions.

However, your ability to get a loan could still be somewhat affected in that your current lenders may report you as late, because you are either not paying what you initially owed or because your credit counselor isn't sending your payments in on time. The fact is, late payments will and do hurt your credit score.

Myth No. 4 - Your FICO

isn't the only score you need

to check. Actually, there are three major credit bureaus who offer FICO credit scores using the formula developed by Fair, Issac - but each are known by a different name.

Equifax calls it the "Beacon Credit Score." TransUnion refers to it as "Emperica." Experian has it designated as "Experian/ Fair, Isaac Risk Model." The simple truth is that your score will not be exactly the same with each credit bureau - mainly because they don't all share the same data.

One bureau may list more accounts for you, etc. Considering these differences, it is critical that you pull and carefully scrutinize your credit reports from each of the three bureaus prior to applying for a mortgage or a loan. Some lenders may take the middle score of the three bureaus as an average, so identifying and taking action to correct any errors as soon as practical is a good idea.

You can get all three of your FICO scores from my Fico.com

The bottom line in how to improve your credit score is:

1) fix any errors on your report(s);

2) pay your bills on time;

3) pay down your debt; and

4) apply for credit only as needed (think twice before you do so!)

- This information is presented by the U of H/Coastal Plains Small Business Development Center for Matagorda and Wharton counties. Call (979)244- 8466 for more information.