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The 3-Digit Summary of Your Financial Story: Separating Fact from Fiction about Credit Scores

Everyone knows that your credit report and credit score help determine your likelihood and cost of using other peoples’ money to get all the stuff you want: houses, cars, cell phones and a job. Let’s try to take some of the mystery out of the 3-digit credit (or FICO) score that can have such a great impact on your financial life.

Fact or Fiction? There is a website where you can get your credit score for free.

Fiction. The website will provide your free credit report, which includes information on current and closed credit accounts, employment and address history, and public information such as judgments, bankruptcy, and tax liens. For around $8, you can purchase your FICO score.

Fact or Fiction? The three major credit bureaus — Experian, TransUnion and Equifax — will all have the same information and same credit score.

Fiction. It is quite possible that not all reports will have the same information and each score may be different. You should review information from all three bureaus for accuracy.

Fact or Fiction? You shouldn’t close credit lines that have no balance or are not being used, since this lowers your credit score.

Fact and Fiction. Closing lines of credit increases your ratio of credit used compared to credit available, which can lower your score. Closing older lines of credit will decrease the length of time reported, which will also lower your score. However, having too many unused lines of credit can increase your exposure to identity theft. If you tend to max out all available credit, remove the temptation by closing out lines of credit as you pay them and resist opening new ones. As a general rule, you should not have more than 4 to 6 unsecure, revolving lines.

Fact or Fiction? Claims such as, “I will now reveal how you can calculate your credit score using your credit report!”

Fiction. One of the prevailing ‘urban legends’ is that experts can give you the secret formula that the credit bureaus use to calculate your credit score. In reality, the bureaus create sophisticated algorithms to determine how to tell lenders about your borrowing habits in the form of a 3-digit number.

Before you all run and get your old math and computer science textbooks so you can crack the code (or if you’re like me and your next move is to get a dictionary to find out what an algorithm is), I’ll save you time. Here is a rough idea of how data on your credit report is ranked, in terms of its contribution to your credit score:


  • In First Place: Your Payment History – Do you pay your debts as agreed?  Does your financial history include a foreclosure, or were you just 30 days late one time?
  • A Close Second: How Credit is Used –This includes how much you owe, what types of loans you have and how much of your available credit is being used.
  • Third Place: The length of your credit history.
  • Last and Least: Your number of inquiries and new accounts. These represent uncertainty, which makes the scorekeepers nervous.

Fact or Fiction? Inquiries made by prospective employers, current lenders for periodic reviews, or companies that send you pre-approved offers don’t affect your credit score.

That’s a Fact. They do not have the same effect as inquiries for additional credit because they have no impact on the individual’s debt position.

Can we help you separate more fact from fiction? What questions do you have about credit scores and reports?

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Posted in Banking Basics, Financial Education.

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