There seems to be a lot of confusion today about credit scores.  Most of this confusion seems to primarily center around two things:  1)  consumer report scores differentiating from mortgage scores and auto-enhanced scores, and 2)  what factors influence credit scores.  It sometimes seems that the consumer is purposely being kept in the dark.

Today, we’re going to take a look at the different types of credit reports and credit scores.   While numerous types of credit reports exist (many of them are specialty reports), there are three basic types of reports: Consumer Reports, Mortgage Reports and Auto-Enhanced Reports.  Here is a brief description of each:

Consumer Reports:  This type of report is a great resource for consumers to monitor their credit.  Consumers are entitled to one free credit report per year (this can vary depending on the state in which the consumer resides) and are available at AnnualCreditReport.com.  When you pull this type of report, it’s considered a “soft” inquiry that won’t affect your credit scores; however, you typically can’t purchase goods or services with a Consumer Report.

Mortgage Reports:  This is report that your mortgage loan officer would use to make a credit decision when you are purchasing or refinancing a home.  This report normally contains the most thorough details, along with resource codes that spell out what factors are having the greatest effect on your credit scores.  This type of credit pull is considered a “hard” inquiry and can affect your credit scores.

Auto-Enhanced Reports:  When you go to an automobile dealership, this is the report that the finance department will use to determine your credit worthiness to purchase or lease a vehicle.  As the name implies, the scores are enhanced based on your previous automobile payment history.  If you have an excellent car payment history, your scores on this report will probably be higher than on the other reports.  Conversely, if you have a poor car payment history, these scores may be lower than on the other reports.  Because the purpose of pulling this report is to purchase a vehicle, this is also considered a “hard” inquiry and may affect your credit scores.

A few years ago, the Washington Post had an excellent article explaining that these three types of scores can vary by as much as 200 points!  While I’ve personally never seen this much of a discrepancy, I have seen these scores vary by as much as 90 to 100 points.  The good news is, the US Government has put the Fair Access to Credit Scores Act of  2010 in place to ensure that consumers now have access to various credit reports and credit scores if they were denied credit.  You can find more details of this act at the SmartCredit.com Blog.

I hope this helps clear up some of the confusion that consumers face when confronted with different types of credit reports and credit scores.  In the near future, I will be discussing what factors actually affect your credit scores, and what those affects are.

If you have any questions regarding your credit scores or your credit situation and would like to visit with someone, please feel free to personally contact me, Brad Boruk, at 214 504-7101.

Brad Boruk
FCRA-Certified Credit Strategist
National Credit Solutions
214 504-7101

Myth #1: Checking your credit hurts your credit score.

Depends on what type of report is pulled. If you obtain a copy of your report on your own to review from the credit bureaus you will be doing a “soft inquiry” which does not affect your score. If you have a lender pull your credit than you are doing a “hard inquiry” which may negatively affect your score. One thing that I have seen happen frequently is a process called “shotgunning” your credit to potential lenders when you apply for financing on a car or mortgage—you apply for financing at a car dealership and they “shotgun” it to all the lenders that they work with who all check your credit, thus putting in some cases dozens of “hard inquiries” on your report simultaneously. Protect yourself and make sure you know what a company is going to do with a credit authorization form before you fill it out. My best advice for protecting yourself is to line up your own financing through your credit union before purchasing a big ticket item, that way you know exactly who pulls your credit and why.

Myth #2: The higher your income, the better your credit score.

Higher income can translate to buying power, but that doesn’t mean it translates to financing power. You could make $200k a year and still have terrible credit if you pay your bills late. I’ve seen it a thousand times. It almost seem like credit scores are inversely proportional to income because people in higher income brackets seem to be so caught up in the job of making the money that they don’t have time to keep their personal finances tidy.

Myth #3: Closing a credit card will boost your credit score.

All I can say here is NO. I see so many people who are confused by why their scores went down, rather than up, after they paid off their debts and closed their cards. Simply put, if you close your cards you destroy your “utilization ratio”, the comparison between your credit limits and how much of them you have used.
Consider this scenario. You have 3 credit cards with $1000.00 credit limits. All three have $500 balances. Your utilization ration is 50%. Now say one of the cards raises your rate and you decide to close it. So you transfer that $500 balance to your other two cards and close it. Now instead of having $3000.00 in credit with $1500 in balances, you now have $2000 of credit with $1500 in balances, increasing your utilization ratio from 50% to 70%. You want your utilization ratio as low as possible.

Myth #4: All creditors and lenders use the same credit score.

There are a variety of credit report types that give added weight to different aspects of your credit history. A mortgage enhanced report would allow your payment history on mortgages more strongly impact your credit score, while an auto enhanced report would give more power over your score to you payment history on automobiles. In addition to that complication, there is also the fact that there are three different major credit bureaus with their own scoring models.

If you know that your score with one bureau is higher than your score with another, is may behoove you to find out which report a lender looks at before applying for financing. Many banks only look at one bureau, use that to you advantage by finding the one that looks at the credit report that’s most favorable to you.

Myth #5: If you pay your bills on time you’re credit is fine and you don’t need to monitor it.

Fraud is rampant, and even more importantly creditors make mistakes. Just like you count your change after you pay for something with cash to make sure the cashier got it right, check your credit report regularly to make sure your credits got it right, and to make sure someone isn’t opening credit in your name.

Myth #6: Delinquent debts are removed from your credit report when paid off.

Sadly this is not true at all. Keep in mind a credit report is about your credit history, not just your current situation. That means the report is going to show that you missed a car payment 5 years ago just like it will show that you’re currently a month behind on your credit card payment.

Another myth directly related to this is that the negative items on your credit report come off after 7 years. The truth is, they often remain on credit reports far, far longer than that because bad debts gets moved around and update, and each time that happens the timer on the debt is reset. Should this happen? No, does it happen? Every single day. Unless you catch it and know how to fight it your scores will be negatively impacted far longer than 7 years.

In addition, many people don’t realize that the older a trade line is on your credit report, the less it affects you. So with that in mind, don’t be surprised if you pay off an old debt and your score goes down because you have reset the date of late activity on the account, making that old debt suddenly appear fresh again to scoring models.

Myth #7: Your checking and savings accounts in good standing will help your score.

Depository account information is not reported to credit bureaus… usually. Keep in mind if you have overdrafts that go to collections those can be reported or your credit report, but that’s typically rare.

Myth #8: Paying cash for everything will ensure a good credit score.

Completely untrue. You must have and use credit to have a credit score, and you must have ample credit used properly to have a good score. This is why a college student wanting to buy his first car usually needs mom and dad to cosign.

Myth #9: Library fines, unpaid parking tickets and utility bills don’t affect your credit score.

Any bill that is unpaid can end up with a collection company, so even if the original creditor doesn’t report to the credit bureaus that doesn’t mean the collection agency they pass it to when you fail to pay doesn’t.

Myth #10: Debit cards and pre-paid credit cards can help you build credit.

Your credit report reflects your management of debt, debit cards and pre-paid cards are not considered debt, you’re just drawing from a fund you’ve already set aside to be spent. To build credit you need a good mix of secured and unsecured debt, i.e. credit cards, car loans, mortgage loans, etc.

By the way, if you’re wondering why there’s a red griffon on the page, it’s because this is an article about myths… and griffons are mythological creatures.