What are those 11 herbs and spices? How does that cola taste that way? How did they come up with my credit score?
It may seem like Fair Isaac, the company behind the FICO Credit Score, is as secretive as KFC and Coca-Cola when it comes to its credit score recipe, but there are apparently some credit score myths we now have confirmation aren't true.
An article written by Farnoosh Torabi in August 2015 on Chase.com included information from Ethan Dornhelm, senior principal scientist at FICO. Yes, apparently it takes a scientist to understand how a credit score is tabulated.
Since the vast majority of homebuyers need to finance the purchase of a home, you should know about the following five credit score myths debunked by FICO's Dornhelm. The artice states that the FICO Credit Score is used in more than 90 percent of lending decisions.
Myth No. 1: The Higher Your Income the Better Your Score
Potential homebuyers often state, "I'll have no problem getting a mortgage. I earn a good salary." Dornhelm told Chase.com that income is not included in credit reports, so it has no impact on your credit score. Of course a homebuyer needs income to qualify for a home loan, and more income likely will help you qualify for a larger loan, but credit scores simply don't factor in your salary. Great income isn't going to help a 520 credit score. FICO Credit Scores are based solely on information listed on your credit report, such as your credit history and new credit accounts.
Myth No. 2: Carrying a Balance Will Improve Your Score
Carrying a balance on your credit card will not improve your credit score, Dornhelm told Chase.com. The flawed theory is that carrying a bigger balance than necessary shows you're able to “manage" and “use" credit. "Ideally, you should pay off your credit card monthly or pay off as much as you can. Measures of your debt burden, such as the share of your available credit that you're using make up roughly 30% of your FICO Score," according to Chase.com. The lower your debt-to-credit ratio, which is your total credit-card debt divided by the total of your credit limits, the better it can be for your credit score. Apparently the average debt-to-credit ratio for “FICO High Achievers" is about 7percent.
Myth No. 3: Closing My Card Account Will Erase Its History
Sure, it would be nice to wipe away those three late payments from your credit report by closing an account, but no such luck. Closed accounts may show up for years, according to Dornhelm. In fact, closing that account may negatively affect your credit score because it diminishes your available credit; therefore, it raises your debt-to-credit ratio. The good news is that because the account isn't erased from your report your credit history remains on the report, and length of credit history – the longer the better – "comprises about 10 [percent] of your score."
Myth No. 4: Employers Can Check My Credit Score
An employer may pull your credit report with your permission, but not a credit score. A credit report review by an employer is considered a "soft" inquiry, not a "hard" inquiry from a potential lender. Hard inquiries may or may not affect your credit score, but a soft inquiry will not affect your credit score.
Myth No. 5: All FICO Scores Are Created Equal
Actually, there are multiple versions of credit scores for different kinds of loans. Although similar, you may "notice subtle differences," according to Dornhelm. For example, your credit score for a home loan may not be exactly the same as your "FICO Auto Score." In addition, FICO scores are based on the credit information from each credit bureau. Different credit bureaus may have slightly different information about you. The information depends on what creditors reported to the credit bureaus and any changes or corrections to your credit report you may have requested. Also, some credit scores are not FICO Scores, such as "educational" credit scores available free online. Those are not the scores used in lending decisions.
Needless to say, your credit score is important, so wanna-be homebuyers should keep an eye on their credit reports. You can get a credit report free from each of the three major credit bureaus every year through the AnnualCreditReport.com Web site. You also may want consider the effect on your credit report when you open and close accounts and decide how to handle debt, payments and account balances.