3 Credit Score Myths You Should Know

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By guest writer Steven Millstein

A credit score is a rating that reflects your ability to pay back your debt based on your past credit performance. As explained in this article, a higher credit score implies that you are very likely to pay off your credit while a lower credit score denotes a strong possibility that you could default on a debt or pay it late. However there are some myths that anyone willing to improve their score should know.

Myth 1: There is only one kind of credit score

Contrary to what one might think, there is no approved method for calculating credit scores, therefore different credit bureaus can use different formulas. Among the multitude of agencies out there, there are three main agencies worth knowing: Experian, Equifax, and TransUnion. You might think that their scores would be similar, but that is not the case because each of them have their own calculation method.

Myth 2: Cancelling your cards help your credit score

It is easy to assume that the fewer credit cards you own, the higher your score. However it is really more a matter of the balance you owe in relation to the total amount of credit that you can draw from. Therefore, sometimes you are better off reducing your balance rather than cancelling some of your credit products. For example, let’s say that you have two credit cards: The first one has a limit of five thousand and a balance of three thousand (i.e. 60% utilization rate). The second card also has a limit of five thousand but with a zero balance. The two cards combined only represent 30% utilization of the total ten thousand dollars available to you, but if you cancel the second card, your utilization rate will go up to 60%, which may harm your score. However, keep in mind that adding a card just to increase your available credit is not a great idea because applying for a card could incur a credit check that can hurt your credit score.

Myth 3: Your credit score is completely right

Credit agencies often make errors on your credit score, either by assigning the wrong information to your account, or by not updating it properly. Therefore, you need to check your credit score and credit report on a regular basis at the main credit agencies. Your score may improve significantly if you manage to have your information corrected. If you need further tips to improve your score, read this article and 10 Tips To Improve Your Credit Score.

 

About the author: Steven is a professional personal finance writer. He is a contributor for several professional finance sites. His work has been mentioned in and linked to from, USA Today, The Huffington Post, Benzinga, Investopedia and many other publications. He also has his own personal finance blog, Credit Zeal, where you can follow him.

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