Four Myths About Your Credit Report

There's a lot of misinformation being propagated about what does and doesn't hurt your credit score.

Following are the credit-scoring myths to watch out for:

Closing accounts can help your credit score. No, no, no. For the umpteenth time: Closing accounts can never help your credit score, and may hurt it.

The credit score looks at the difference between your available credit and what you're using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.

The score also tracks the length of your credit history. Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score.

Rather than closing accounts, pay down your credit card debt. That's something that actually can and usually will improve your score. Check out the Credit Center in Microsoft Money 2004 to access a wealth of credit and debt related tools, information and guidance, as well as a free credit report and monitoring from Experian.

Checking your FICO score can hurt your credit. Applying for new credit is generally what hurts your score. Ordering a copy of your own credit report or credit score doesn't count. Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also aren't going to hurt you, either-unless you actually take them up on their offers.

If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO score treats multiple inquiries in a 14-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.

For most people, one inquiry will generally knock no more than 5 points off a score (and scores typically run from 300 to 850, so that's not a big percentage).

Credit counseling will hurt your score as much as a bankruptcy. The current FICO formula ignores any reference to credit counseling that may be in your file. That's been true for the last three years, after researchers at Fair, Isaac, the company that created the FICO scoring system, noticed that people getting credit counseling didn't default on their debts any more often than anyone else.

Lenders consider other factors besides credit scores in making their decisions, as well. The factors they look at can vary widely. Most want to know your income, for example. Some want to know how much savings you have or whether you're a homeowner. Some will find credit counseling disturbing, while others see it as a good sign.

Your FICO isn't the only score you need to check. This came from lenders who thought the FICO score is offered by only one of the three credit bureaus: Equifax.

In reality, all three of the bureaus offer FICO credit scores using the formula developed by Fair, Isaac, but they each give the scores a different name. At Equifax, the FICO is known as the Beacon credit score. At TransUnion, it's called Empirica. At Experian, it goes by the unwieldy title of "Experian/Fair, Isaac Risk Model."

Complicating matters further is that you'll probably have three different scores from the three different bureaus, largely because the bureaus don't all share the same data.

Because of those differences, it does make sense to pull and examine your credit reports from all three bureaus before you apply for a big loan like a mortgage. Many mortgage lenders take the middle score from the three bureaus when making their decisions, so fixing errors in all three reports before you shop for a loan is smart.

You can get all three of your FICO scores from

But the ways you improve your credit score are the same in any case: Correct errors. Pay your bills on time. Pay down your debt. And apply for credit sparingly. With a suite of financial management tools such as the Bill Calendar, Debt Reduction Planner and Credit Center, Microsoft Money can help you organize your finances and address the trouble spots before pursuing a home loan.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.

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