Jean Chatzky
1. Your score doesn’t determine what you pay…
The biggest fail by the 200,000-plus people who took the survey (you can take it here) was in the answer to a question about how much more a low-scoring borrower with a $20,000 60-month auto loan would pay than a high-scoring borrower. The answer, which only 22 percent of people knew, is $5,000 — in other words, about a quarter of the price of the car.Why such a big difference? Credit scores are converted to odds by lenders. “It’s formally referred to as an ‘odds to score relationship.’ Specifically, it is the odds of the applicant going severely delinquent on their credit obligations,” says credit expert John Ulzheimer. The higher the score, the better the odds that you will not go delinquent, and the lower the score, the better the odds that you will go delinquent. “Those odds are then used to set the terms of an account, such as the interest rate,” says Ulzheimer.
…or whether you get an offer at all.
Borrowers tend to know that their score is looked at by mortgage lenders and credit card companies, but they don’t realize that some landlords, utility and even cellphone companies do as well. They use the numbers not only to determine what you pay but whether or not to do business with you at all.
2. Carrying a credit card balance helps your credit score.
More than 1 in 5 credit-card users, or 43 million Americans, carry a balance – or pay the minimum to credit card companies, thinking it’ll help improve their credit scores.
But carrying a balance is not one of the factors that go into creating a credit score. Lenders that check your credit report can see the utilization reported by your credit card issuer — and whether or not you pay your bills on time. But they don’t know whether you carry a balance month-to-month or whether you pay it in full. Rather than carry a balance, credit card holders should focus on lowering their credit utilization. “The quickest way to raise your credit score is to lower your credit card balances, which is called your utilization rate,” says Jeff Richardson, Vice President of Communications at VantageScore Solutions. He adds that missed payments and defaults take a while to recover from, but by lowering balances your score can be positively impacted relatively quickly.
3. You only have one credit score.
“One of the most problematic myths is that you only have one credit score, that’s not even close to being true,” says Ulzheimer.
You have three main credit reports and countless credit scores based on the data in those reports. Lenders use many different scores and many large credit card issuers develop their own customized scoring models. “It’s an important concept because many consumers are led to believe that a score they might get from their credit card company or one that is used in a credit monitoring tool will be used in their next credit application,” says Richardson. He suggests using free credit scores as a directional way to understand how a lender might interpret your creditworthiness and to make sure your credit reports are free from errors.
4. Bad score equals panic.
Are you up a creek if your score isn’t in the range you need for a lower-interest loan? Not necessarily. “You can compensate for having a low score with increasing your down payment on some installment accounts,” says Richardson. “Another important concept that many consumers overlook is that lenders will offer different terms and compete for your business, so shop around.”
5. Improving credit score take a long time.
Finally, understand that if you’re working on your score, getting it into decent shape will not take forever. With good credit behavior, you should see movement in the right direction inside of six to 12 months. In 24, you should be very close to where you want to be.
With Hattie Burgher
Chris O'Shea
