Your Credit Score: Myths and Mistakes

When you apply for credit, lenders typically get reports from two or three bureaus and choose a "representative" credit score -- the lowest of two or the middle of three -- on which to base their decision. This score influences whether you'll be granted credit and determines the interest rate you're offered.

With so much riding on this number, it's important to understand it. Unfortunately, there are many misperceptions surrounding credit scores. Here are five of the most common myths and the facts to set you straight.

MYTH #1: There Are Three Credit Scores

There are three major credit bureaus -- Equifax, TransUnion and Experian -- but there are many more credit scores. In fact, most creditors don't use the same reports and scores that consumers receive when they check their own credit. According to CNNMoney, there are 49 FICO scores out there -- some geared especially to auto lenders, personal lenders, mortgage lenders and credit card companies. In addition, the three bureaus have worked together to create another popular scoring system, the VantageScore. You can see your VantageScore for free right now on's Money Center. Unlike other "free" credit report sites, this one is truly free; no one asks you for a credit card number.

MYTH #2: Closing Old Accounts Boosts Your Score

Having too many open accounts can drop your credit score, but canceling old accounts may make things worse. Two other factors come into play -- first, 30 percent of your credit score is derived from your "utilization" ratio. That's the amount of credit you're using divided by the total amount available. If you have two $5,000 credit lines ($10,000 in available credit), and you use $3,000, your utilization is $3,000 / $10,000, which is .3 or 30 percent. Close one of those lines, though, and your ratio climbs to $3,000 / $5,000, which is .6 or 60 percent. Higher utilization equals lower scores. In addition, the age of your accounts makes up 15 percent of your score. So if one of your $5,000 accounts is 20 years old, and the other is five years old, their average age is 12.5 years old. Closing the old one drops the average to just five years.

MYTH #3: Shopping for a Mortgage Tanks Your Credit

When you apply for credit, the lender pulls your credit report. This can cause a temporary loss of about five points from your score if you have a typical credit profile (and pulling your own credit report has NO effect on your score). Fair, Isaac, the company that created the FICO score, says that the impact can be greater for those with fewer accounts, shorter histories or credit problems. For most people, though, inquiries just aren't a factor. In addition, when you shop for a mortgage or auto loan, most scoring systems are designed to treat multiple inquiries to these lenders as a single inquiry -- bureaus know you're unlikely to be taking out five mortgages just because five different lenders pulled your credit report.

MYTH #4: Paying Off Collections Instantly Fixes Your Score

Your credit score is a measure of your past performance. If you have a history of charge-offs or collections, paying them off won't undo that kind of damage overnight. Unless you negotiate with the collections agency to remove them, accounts with a "collection" status can stay on your report for up to seven years, whether or not you pay them off. In fact, paying off an older collection can hurt you. Your credit score is most greatly impacted by recent history, and as events slide into the past, their effect diminishes. This means a five-year-old collection isn't affecting your score too much right now, but if you pay it, it becomes a new event -- actually reducing your score. You can get around this by making your payment only with written assurance from the creditor that it will delete the collection or report your account as "paid as agreed."

MYTH #5: Companies Can Fix Your Score for a Fee

Reputable firms help you resolve errors on your report (which you can do yourself) by contacting the bureaus and filing paperwork. Mortgage lenders can refer you to "rapid rescorers," which are legitimate outfits that remove inaccurate information quickly and at a reasonable cost. Less-reputable companies employ a technique known as "jamming," filing disputes with every credit bureau for every negative entry, even correct ones. If the creditors can't quickly verify the debt to the bureau, the entry comes off -- temporarily, because the creditor re-reports the negative information if it's correct. Other techniques include having you fraudulently apply for a new tax identification number (this is illegal), or buy credit history from people with good credit -- paying hefty fees to be listed as an "authorized user" on their accounts and getting their "good" history incorporated into your scores. This is called "piggybacking." Again, this is something you can do yourself if you have friends or family with good credit. The deal is you don't get a card, you don't even know what the account number is. Additional "good" accounts can boost your score if you don't have much history, but they won't offset irresponsible debt management on your own accounts.

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