Credit Score Confusion

Answers to six commonly-asked questions about credit scores

If you’re one of the millions of Americans who don’t know their credit scores, you could be missing out on an opportunity to save money on your mortgage, cars, jewelry, electronics, vacations and anything else you may charge.

Your credit score is an estimate of your credit risk, which is based on your credit report. Lenders use this number to determine how likely you will be to repay a loan or line of credit in a timely manner. The higher the score, the more likely you’ll receive a lower interest rate, and ultimately save money.

Only 27 percent of consumers understand that credit scores measure credit risk – not credit knowledge, amount of credit or attitude toward credit, according to the Consumer Federation of America.

"There are many misconceptions circulating about the function and purpose of credit scores," said Mike Sullivan, director of education for Take Charge America, a national non-profit credit counseling agency. "Yet, this three-digit number can impact you financially nearly every day of your life."

American consumers have an average of 13 credit obligations on record at a credit bureau, according to Fair Isaac Corporation, which pioneered the most common credit score, called the FICO score. These obligations include commonly-used credit cards, store cards, gas cards and installment loans, each of which has an impact on your credit score.

To help sort out the confusion, Sullivan answers six common questions about credit scores:

· Do I have only one credit score? No, lenders are not required to report to each of the three major credit bureaus: Equifax, Experian and Trans Union. Each agency may have different information on your report, and therefore, a different score.

· If I continually check my credit report, will that lower my credit score? You can check your report directly from the three credit bureaus as many times are you want, and it will not affect your credit score. You can visit ReliaCredit - www.reliacredit.com to obtain your FREE Credit score from all three credit card bureaus

· If I cancel a credit card, can that lower my credit score? Yes, canceling credit cards can actually decrease your score. For instance, if you have $50,000 in available credit and owe $10,000, then you owe 20 percent of your available credit. If you close an account with a $30,000 credit limit, you will then owe the same $10,000 but it will be 50 percent of your available credit. That lowers your credit score. It also affects the history part of your score, lowering it even further.

· Does my salary affect my credit score? Your credit score is based on the amount of credit and debt you have, not how much money you make. If you receive a raise, and your credit and debt remain th
e same, your credit score will not improve. If you receive a raise and use that extra money to pay down your debt, then your credit score will improve.

· Does shopping for a loan lower my credit score? While multiple inquiries do show up on your credit report, they do not necessarily damage your score. If the same types of inquiries are made within 14 days of each other, they only count as one inquiry on your credit report. Keep in mind that this applies to loans, not credit cards.

· If I only use cash to make purchases, will I improve my credit score? Your credit score is determined by the amount of credit you use, not the amount of cash you use. A steady, responsible use of credit is the best way to build your credit score. You need to find a middle ground, as an absence of credit as well as an overuse of credit can work against you.

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