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What impacts credit scores

Date: March 1, 2013

Myth: Leaving a balance on a credit card each month will cause you to build a credit score faster than paying the card in full each month.

Fact: You will not build a solid credit score any faster by carrying a balance than you would if you paid your credit card balance in full each month.

The speed at which you build a credit score is largely based on the age of a credit card account, not whether or not you carry a balance. A credit card opened 12 months ago is a one-year-old credit card, regardless of your payoff or balance rollover practices. Additionally, carrying a balance on a credit card each month means you’ll incur interest charges.

The best way to build a solid credit score is to manage all of your accounts properly. Best practices include paying all of your credit obligations on time every month, applying for credit only when needed, and keeping balances on credit cards as low as you possibly can, if you cannot pay them in full each month.

Myth: Charge cards are treated the same as credit cards by credit scoring models.

Fact: The credit obligation associated with a charge card is similar to, but not the same as, a credit card obligation. As such, there are subtle differences in how they're considered by credit scores.

A charge card is different than a credit card in that the balance is due in full each month, while credit card balances can be carried, or “revolved,” month to month. Charge cards do not have published credit limits, where credit cards do.

Charge card accounts factor into credit scores, but they are not used by the VantageScore credit scoring model for calculating various “balance to credit limit” measurements, because of the lack of a credit limit.

Myth: Closing your credit card accounts can improve your credit scores.

Fact: Closing credit cards does nothing to improve your credit scores and, in fact, can backfire and leave you with lower scores.

When you close a credit card account, you lose the value of that card’s credit limit in the credit score calculation. The credit limit is an important component when determining a consumer’s “balance to limit” ratio. The balance to limit ratio measurement rewards consumers who have low credit card balances relative to their credit limits.

If you close credit cards, especially those with large credit limits, you will likely cause your balance to limit ratio to go up. This can cause your score to go down, and down considerably in some extreme instances.

Additionally, if you close credit card accounts the credit bureaus will eventually remove them from your credit reports. Even though it can take years for an account to be removed from your credit reports, once it is gone you will get no benefit from your responsible management of that account.

Myth: Credit card balance reductions will devastate my VantageScore credit score.

Fact: Credit scores are determined by a credit report. Credit reports are by nature a reflection of an individual's full credit activity. Accordingly, there are potentially countless "scenarios" in terms of the impact a cancelled card or credit reduction would have on someone's score.

As a very broad and generalized example, the impact is different and less severe on someone with many "trades" (i.e. mortgage, auto loan, home equity, multiple cards, etc.), than on a consumer with a thinner file. So if you have a robust credit file, losing a credit card with a high balance could possibly result in a 20-30 point reduction in your VantageScore credit score, but that reduction could disappear rather quickly. For thinner file consumers, the impact would be greater and likely last longer.

If your score is already low, in other words impacted by late payments, etc., then the reduction in the credit score will be less from a closed card due to the fact that late payments have a much greater impact.

Myth: Medical debt is a factor in my VantageScore credit score.

Fact: Medical debts are not considered in any format if reported directly from a medical facility. When a medical debt has entered a third-party collection agency, the VantageScore model will consider it because it is classified as a collections account. Paid collections, including paid medical collections, do not factor into your VantageScore 3.0 credit score.

Myth: The more loans I have, the higher my VantageScore credit score.

Fact: It's not the amount of loans that generates a good score – it's how current a borrower keeps them and many other factors such as credit utilization, and the age of loan accounts. In other words, your score can be impacted positively by taking out only a certain number of sensible loans, and keeping them in good standing without missing payments.

Myth: Race and age are factors in a credit score.

Fact: One of the most important misperceptions about credit scores is what information the VantageScore model, or any credit scoring model for that matter, is NOT used. The VantageScore model does not consider: Race, color, religion, nationality, sex, marital status, age, salary, occupation, title, employer, employment history, where you live or where you shop.

Myth: Shopping for a loan hurts my VantageScore credit score.

Fact: Consumers are encouraged to shop for the best loan rates and conditions. Accordingly, the VantageScore model does not penalize multiple inquiries made within a short period of time. When several inquiries are made within a shortened timeframe, it is assumed that the consumer is shopping around for a rate and not opening up multiple lines of credit.

The VantageScore model uses a 14-day rolling window in which all credit inquiries are de-duplicated. All inquiries within that window are considered one inquiry regardless of the type of account. So regardless of whether the credit inquiry is made in response to a mortgage, auto or bank credit card application, it will be counted only once during that 14-day window.

Myth: The fewer credit cards I have, the higher my score.

Fact: Credit reports are a reflection of an individual's credit activity. Accordingly, there are potentially countless scenarios where the number of credit cards owned may impact your credit score. Prudent handling of your personal finances is the best way to manage debts. Therefore, it is generally a good idea to have a limited number of credit cards for long periods of time that have low balances and are kept in good standing.

Myth: If I have a credit balance on my cards, my VantageScore credit score will improve.

Fact: If you have a credit balance, it means you don't owe anything to your credit card lenders and they actually owe you, which is good from a personal financial management standpoint. Credit balance does not positively or negatively impact credit score.

Myth: As soon as I pay off my credit card debt, my VantageScore credit score will get better.

Fact: The amount of debt you have in relation to the amount of credit you have available is a significant contributor to your credit score; however it is only one of several factors. While your credit card and other loan balances may be low as a result of a recent payment, due to the lenders' reporting cycles, it may take some time for the payments to be reflected in your credit score. Moreover, available credit and balances are only one of a number of other factors that are considered by credit score models.

Improving your credit score can be achieved over time by regularly practicing these sound financial management techniques:

• Pay your bills on time
• Apply for credit only when it's needed; do not open new accounts frequently or open multiple accounts within a short time span
• Keep your outstanding balances low - a good rule of thumb is not to exceed 30% of your available credit limit with each account
• Pay any delinquent accounts as soon as possible and then keep them current