Consumer Warnings For Credit Score Myths

Consumer awareness over credit scores has never been higher than now. The economic downturn, rise of unemployment and the credit crisis is making American consumers more financially sensitive. However, even with the increased awareness of their credit scores, a lot of American consumers still have some ill advised beliefs about their credit score – myths which could end up hurting them financially.

One such myth is that a consumer must carry a balance on their credit cards to have a good credit score. This is actually a common myth and has resulted in many a consumer needlessly paying interest every month. FICO scores, the most commonly used credit score in the U.S., requires that a consumer have an account that is at least six months old, that appears in their credit report and that has seen some recent activity withing that six months span of time in order to generate a credit score for that consumer. It does not necessarily have to be a credit card. Mortgages, student loans and other types of consumer loans may also be used. Carrying a balance from month to month does not improve a consumer’s credit score and may actually damage it in the long run.

Another common misconception is that closing credit cards can improve a consumer’s credit score. Credit scores take into account the utilization rate of a consumer’s credit. This is basically a ration between the debt that a consumer carries and the amount of credit available to him. A lower utilization rate is preferable. When a consumer closes down a credit card, his available credit drops which increases his utilization rate, dinging his credit score. This does not mean that consumers should keep a credit card open indefinitely, however. Credit cards can be safely closed down as long as the consumer carries very little or no balances.

A widely believed misconception about credit scores is that on time payments are a guarantee of high credit scores. Paying on time has a large impact on a consumer’s credit score. However, it does not dictate it entirely. The payment history of a consumer accounts for 35% of his FICO score, actually the biggest portion of the score. However, the other smaller portions make up 65% of the score. If a consumer does not watch out for these smaller portions, he can still have a low FICO score while still paying off his bills on time. Some things that could bring a consumer’s credit score down even with on time debt payments are opening a number of credit lines in a short period of time and maxing out credit cards.