Are you trying to raise your credit score? Perhaps you have had problems with it in the past, or you are trying to raise your score to qualify for the best rates on an automobile loan or a home mortgage. Either way, you need to trust sound advice and not follow these five misconceptions:
- Closing accounts will boost your score.
When people try to improve their scores, one of their instinctive reactions can be to close some or all of their accounts. Yet this action, by itself will not help your score, and it may even hurt it. Closing accounts reduces your account history and will increase your debt to credit ratio, for a given amount of debt. So unless closing your accounts is the only way for you to control your debt levels, its much better for your score to keep your accounts open and in good standing.
- Opening a new account will hurt your score.
Just as many believe that closing accounts will help their scores, there is also the widespread assumption that opening a new account will necessarily hurt it. In fact, opening a single account, and using it responsibly, will increase your account history and reduce your debt to credit ratio, for a given amount of debt. The only problem is when people open several new accounts within a short period, which will be interpreted by the scoring formulas as an indication of financial trouble.
- Avoiding interest charges means avoiding debt.
The best way to use credit cards is to avoid interest by paying your entire statement balance in full and on-time. Yet just because you do this every month, you can't assume that your report will not show any debt. To the contrary, each month's statement balance is reported as debt, whether or not you eventually pay it in full by the due date. So if you are using up the majority of your combined account limits each month, your score will suffer due to this reported debt, even if you never pay a dime in interest charges. To avoid this issue, you can increase your total amount of credit available by opening new accounts or raising your existing limits. Or, you can choose to pay down your balances before your statement closes.
- Focusing on the number of recent inquiries or length of open accounts is the best way to improve your score.
Once people learn that excessive recent inquiries will hurt their score, or that keeping accounts open longer can help their score, some will focus on these factors in the hope that it will be the key to improving their scores. In fact, these factors account for a relatively small percentage of the scoring formula, and can distract you from the big picture. Payment history makes up 35% of your FICO score, and your amounts owed carry comprises another 30%. In contrast, new accounts makes up 10%, and your length of credit history is just 15%. So if you scrupulously pay all of your bills on-time and carry very little debt, then you do not have to worry about the other factors and still maintain and excellent score.
- It's always important to have the highest score possible.
A FICO score is not like sport scores, and there is no prize for having the highest one. In general, having a FICO score above 740 is considered Excellent, and raising it to 780 or 820 will not allow you to qualify for additional accounts or lower rates. While you may want to have your score comfortably above 740 to give you a little room for error, there is no reason why you should worry about getting it as high as possible.