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.
"Closing an account will never help your score," says Ryan Sjoblad, public relations manager for Fair Isaac's online service www.myfico.com. "More than likely, it will hurt your score. You're closing the door on credit history."
The only time to even consider closing an account, says Weston, is when you're seeking a large loan like a mortgage and a lender asks you to close it to reduce the chances that you'll become overextended.
Here are some of the other common myths, according to Weston, the Consumer Federation and Fair Isaac:
Checking on your own score will lower it. Not so, say the experts. In fact, you should check your score at least once a year (myfico.com charges $12.95 to obtain a FICO score that is based on any one credit bureau and $38.85 to get FICOs from all three reporting services).
What can downgrade your score, notes Weston, is having a friend or family member who works at a bank or mortgage company pull it for you. That counts as a "hard" inquiry from a lender, and too many of those can hurt.
Shopping around for the best loan rate can count against you. Fair Isaac recognizes that smart consumers do this and therefore doesn't penalize them. So the company lumps together as one all inquiries on mortgages or auto loans made within 14 days before the score is created. Also, any inquiries you make 30 days before the score is drawn up are automatically ignored.
Marrying someone with a good score will improve yours. More than half of those surveyed by the Consumer Federation believed that a married couple has a combined score, not individual ones. In fact, each spouse has an individual credit score, but these will be similar if they share most accounts.
It's important to keep in mind, however, that each person has more than one score. That's because each of the three credit bureau biggies keeps somewhat different information, leading to three different scores.
Checking your score is something only lenders do. In fact, scores are used routinely by landlords screening tenants and auto and home insurers because it's been shown there's a high correlation between poor scores and a tendency to file claims.
Some employers also require it, particularly for high-level managers dealing with finances and for government jobs that require security clearance, says Weston. But no one is supposed to obtain your credit score without seeking your permission first.
Fixing bad credit history can be accomplished quickly. You can't erase negative information, such as late payments and collections, which can remain on your record for as long as seven years. But you can improve your credit score by correcting errors that reflect badly and by paying down outstanding debts. The myfico.com site offers those who purchase scores the use of a simulator that tells them, within a range of scores, how certain actions would improve or hurt their ratings.
Weston says that most of the mail she receives from readers about credit scores comes from consumers struggling with credit mishaps and wanting advice on how to improve their standing. But she also gets a surprising number from people at the other end of the scale, those with nearly perfect credit. "They have a 780," she says, "and demand to know why they don't have an 850."
For more information visit www.experian.com, www.transunion.com and www.equifax.com.