Credit Scoring Myths
I was doing an interview last week when the reporter asked, “What about your credit score? Isn’t it true that if you pay off your credit cards in full it hurts your score?” I almost gagged. I went into conspiracy theory mode, figuring the credit card companies had gotten together at some secret summit, concocted this fairy tale and devised ways to propagate it to boost their profits.
Bottom line: Do not carry a revolving balance on a credit card. This will hurt your FICO score, not help — and hurt your quest to build wealth. (FICO is the score calculated by Fair Isaacs Corp. to determine how likely you are to pay back a loan.) Here are the facts, and how they affect your score:
-About one-third of your score is based on payment history – for mortgages, credit cards, auto loans, and the like. It looks at the number of accounts that are on time versus past due, how long they’ve been delinquent, and so on. Paying accounts on time and in full will boost your score.
-Another 30 percent is based on how much you owe to creditors, including the amount you are owe versus the amount of credit you have available to you. Aim to get your debt down to 50 percent of the maximum credit line on each of your cards. Maxing out credit cards to the limit will hurt your score.
-About 15 percent is related to how long you’ve had particular accounts. The longer, the better, so closing an account that you’ve managed wisely over the years will hurt your score.
-The next 10 percent is based on the number of accounts opened recently. Don’t apply for a bunch of new cards simultaneously; it will hurt your score.
-Another 10 percent is based on the mix of credit used (auto loans, mortgages, credit cards of various type, etc.) If you have a balance of different kinds of loans, you’ll have a better score than someone who has one type of credit – say, multiple credit cards. Your score does not include any negatives from public records, such as bankruptcies, liens, or court judgments. The score does not include your address, age, gender, race, religion, country of origin, salary, occupation, or your employment history.
Order your credit report from all three bureaus every year to check for mistakes. You can request the reports by visiting www.annualcreditreport.com; by calling (877) 322-8228; or by sending a written request to Annual Credit Report Request Service, P.O. Box 105281,
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