The use of credit scores exploded in the mid-1990s, when the nation's biggest mortgage-financing companies, Fannie Mae (FNM) and Freddie Mac (FRE), began requiring them, while lower interest rates prompted millions of homeowners to refinance their mortgages, according to Weston. "Once the refi boom took off," she says, "more people got obsessed with controlling and improving it."
Credit scores have helped make massive amounts of credit available to consumers. Americans now owe trillions of dollars in records amounts of debt on credit cards, auto loans and home-equity lines of credit. The ratio of household debt to disposable income has risen considerably, from 1.01 in January 2000 to a current high level of 1.20, according to the latest U.S. Commerce Department reports.
Although it's widely used, credit scoring is poorly understood and has generated a number of myths, says the author. Some of the most common are spread by well-intentioned mortgage brokers and auto lenders. And, unfortunately, there's no way to know exactly how any one credit action taken will change your score because it's based on a number of constantly changing variables.
At the top of the myth list, says Weston, is the notion that closing some of your credit accounts will help improve your score. This can backfire, resulting in a lower score for two reasons. First, a major portion of your score is based on how much of your outstanding credit you are, in fact, using. If you reduce the amount of credit available by closing accounts, you could be scored lower for using too much credit in the accounts you've left open. And second, you get positive points for having a long history of good credit. If you shut down one of your older accounts, that can also reduce your score.
