Credit score facts & fallacies

Fallacy: A score determines whether or not I get credit.
Fact: Lenders use a number of facts to make credit decisions, including your FICO® Scores. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fallacy: Credit scoring is unfair to minorities.
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.

Fallacy: Credit scoring infringes on my privacy.
Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.

Fallacy: A score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

Gardening your credit

Face it. We live in a world where credit is everywhere. We’re offered a credit card or new mortgage rate every time we turn on the TV, check email or even buy a new shirt. It’s so frequent and accessible, it’s easy to forget the potential impacts on your credit rating. Yes, getting approved can feel like an accomplishment worth celebrating.

But immediately after you’ve been approved for new credit, it’s possible for FICO Scores to temporarily drop. This could be for a number of reasons, such as the fact that you have a new hard inquiry on your reports or because you now have a new loan or credit card with no history of payments yet. Applying for multiple new lines of credit at once can have an even more substantial impact.

If this sounds like you, it might be a good time to focus on gardening your credit.

What is gardening?

Gardening your credit simply means that you are refraining from applying for new credit or taking any actions that might result in a hard inquiry. You’ve planted the seeds of new trade lines, now it’s time to water them and let them grow.

It’s important to approach this tactic with a goal in mind. Are you hoping to establish a history of on-time payments? Are you waiting for negative information to “fall off” your credit reports? Are you simply waiting for your accounts to age?

No matter which goal you choose, try to give yourself a concrete timeline. For example your goal might be “I’m going to garden my credit until July 16th so that my new accounts can age 6 months before I take on any new accounts.”

Once you’ve chosen a goal and timeline, all you have to do is stick with it! Don’t apply for new credit and keep an eye on your reports and scores.

Why garden?

The purpose of gardening is to nurture your new trade lines and, ultimately improve your FICO® Scores. Credit data is complex, so there is no guarantee that gardening will raise your scores the way you envision. Each credit profile is different, and FICO Scores consider many different behaviors. Learn more about what’s in my FICO Scores.

However refraining from new credit applications and waiting for new accounts to age can be a healthy choice for people who have a habit of applying for new credit often.

3 Important Things You Can Do Right Now

1. Check Your Credit Report – Credit score repair begins with your credit report. If you haven't already, request a free copy of your credit report and check it for errors. Your credit report contains the data used to calculate your credit score and it may contain errors. In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct. If you find errors on any of your reports, dispute them with the credit bureau.
   
   Read more about Disputing Errors on Your Credit Report
2. Setup Payment Reminders – Making your credit payments on time is one of the biggest contributing factors to your credit scores. Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due. You could also consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account, but this only makes the minimum payment on your credit cards and does not help instill a sense of money management.
3. Reduce the Amount of Debt You Owe – This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Use your credit report to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.

How to repair my credit and improve my FICO Scores

It's important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. If you haven't done that, then you need to repair your credit history before you see credit score improvement. The tips below will help you do that. They are divided up into categories based on the data used to calculate your credit score. 

3 Important Things You Can Do Right Now

1. Check Your Credit Report – Credit score repair begins with your credit report. If you haven't already, request a free copy of your credit report and check it for errors. Your credit report contains the data used to calculate your credit score and it may contain errors. In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct. If you find errors on any of your reports, dispute them with the credit bureau.
   
   Read more about Disputing Errors on Your Credit Report
2. Setup Payment Reminders – Making your credit payments on time is one of the biggest contributing factors to your credit scores. Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due. You could also consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account, but this only makes the minimum payment on your credit cards and does not help instill a sense of money management.
3. Reduce the Amount of Debt You Owe – This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Use your credit report to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.