Before credit scores were prominently used in the 1980s, human judgment was the only factor in determining whether someone was given credit, according to Philly.com. Understanding common misconceptions regarding credit scores will help you improve your own credit score while staying informed.
Applying for New Credit
One common myth surrounding credit scores is that when you apply for new credit your score dramatically drops. Applying for new credit doesn't necessarily cause your credit score to drop, and if it does, it will only drop slightly, according to My FICO. The majority of credit scores are not affected by multiple auto, mortgage or credit card applications, even if they occur within a short period of time.
Soft Inquiries
Some people don't realize there are two types of inquiries that occur when you apply for new credit. Soft inquiries have no effect on your credit score and include things like a credit card company checking your credit report to see if you qualify for its card. Mortgage lenders also use soft pulls to preapprove mortgages. Potential employers can use them for background checks and banks may use them to verify your identity, according to Lending Tree. Most of the time, you won't know if a soft pull has been performed on your credit score. You can check your own credit score once a year for free with a soft pull.
Hard Inquiries
Hard inquiries do affect your credit score and include things like applying for a loan or a new credit card. Each time you perform a hard pull it lowers your credit score by five points for six months, according to Lending Tree. Some banks perform hard pulls when you open a savings account. Limiting the amount of hard inquiries that you pull will help protect your credit score.
How are Credit Scoring Systems Developed?
Credit scoring systems are developed when a creditor or insurance company collects a random sample of its customers and analyzes characteristics to identify risk, according to the Federal Trade Commission. Each characteristic is a weight based on how strong it is at predicting which individuals would be a good risk or investment. The Equal Credit Opportunity Act prevents creditors from using characteristics like race, sex, religion and marital status in these scoring systems.
Average Credit Score
The average FICO credit score in the United States is 678, according to the University of Texas at San Antonio, as of 2010. The FICO credit score is used by the three major credit bureaus -- Equifax, Experian and TransUnion.
Secured Credit Cards
One way of building your credit if you can't get approved for an unsecured credit card is by using a secured card. To get a secured credit card, you pay an up-front free such as $200 and get a credit card with a $200 credit limit. You're basically borrowing your own money, but these payments are reported to the credit bureaus, which will help build your credit score if you make payments on time.
0 comments:
Post a Comment