Debt Smarts: Credit scores and their myths

Lita Epstein is WalletPop's resident credit score expert. Write to her in the comments box below.

Many of the questions I receive relate to credit scores and how to improve them. There are many myths out there which I debunk below, but first let's take a look at what a credit is and who creates it. Actually there isn't just one type of credit score. The primary driving force behind most of them though is the Fair Isaac Corporation, known by most as FICO.

Each of the three credit reporting agencies has a score developed by FICO. Equifax's is called BEACON, TransUnion's is called FICO Risk Score and Experian's is called FICO II. Each one is tweaked slightly differently, so you'll find your credit score is not exactly the same at each agency, but scores are usually within 20 points of each other. If you find a greater difference, one or more of the credit agencies probably have inaccurate information in your credit file.

In addition to these three types of scores, there are new scores from Fair Isaac called NextGen. The names given to these new scores are Pinnacle (Equifax), FICO Risk Score (Experian) and Risk Score Next Gen (TransUnion).

That's not all. In addition to these scores there is scoring done for insurance companies and others designed for different types of businesses that set up a different set of parameters they want monitored. Insurance companies believe that people with a low credit score tend to file more claims, so in many states your insurance premiums can be higher if you have a low credit score.

So what goes into these scores? Generally your payment history has the greatest impact. For the three key credit reporting agencies, payment history accounts for 35% of your score. The next largest piece of the credit score pie is the amount that you owe, which accounts for 30% of your score. Next in line is credit history, which makes up 15% of your final score. Applications for new credit and types of credit in your record each account for 10% of your score. So 65% of your final score is impacted by whether or not you pay your bills on time and how much you owe.

Here are some of the common myths that need debunking:

Myth 1: Lowering your credit limits can help your score

Myth 2: Close cards to improve your score

Myth 3: You must pay in full to get a good score

Myth 4: Shopping for the best rates can hurt your score

Myth 5: Checking your credit score can hurt your score

Myth 6 : Credit counseling hurts more than bankruptcy

Myth 7: Putting a statement in your credit file can help your score

The most important thing you can do to improve your credit score is to be sure your credit report accurately reflects your credit history. If you don't know, get a free copy of your credit report from each of the credit reporting agencies. If you see any errors take the time to correct them.

Lita Epstein is the author of more than 20 books including the "Complete idiot's Guide to improving Your Credit Score."

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