If someone starts their sentence with phrases like “My credit score is…”, “I checked my credit score online and…” or “Authorized user tradelines do not affect credit scores…”, then they are probably misinformed. If you fall into this category, please do not feel bad. If someone actually understands how credit scoring formulas and algorithms work, they probably work for Fair Isaac Corporation. Or, they have spent years reviewing credit reports and scores (like us) thereby obtaining real-world knowledge about how things actually work versus how things are said to work. Therefore, we’ve decided to share a few of the myths we’ve come across and revealed the truth behind them.
My credit “score”
The phrase “my credit score” (in its singular, not plural form) is most fundamentally flawed considering there’s a vast array of credit scores in the marketplace. You do not have a credit “score”, you have credit “scores”. More particularly, you have FICO scores, Beacon scores, vantage scores, plus scores, and an array of other “educational” scores. In addition, each of the score models listed herein has multiple versions of their score.
- When you go to the auto dealer, they are pulling some sort of auto enhanced credit score (probably through FICO or Beacon).
- When you apply for a mortgage, they disregard your high score, disregard your low score and take the middle score which is probably one of the latest versions of the FICO score.
“Online” Credit Scores
When people talk about receiving the credit score online, it reveals two things:
- They are unfortunately unaware of the credit scoring world and
- Credit score modelers have done a great job of staying behind the curtain, as it were, and avoiding the scrutiny of consumers like you.
The “educational” scores referenced above are the scores you will receive from a website online. Let me say that differently, there is no website on the entire Internet which will provide you with a score which a lender will use to evaluate your creditworthiness. Even myfico.com is an educational score (we’ve had many clients who use myfico.com and had substantially different credit scores when a lender pulled their credit). Just to be crystal clear, you can not get your credit score(s) online…anywhere (for free or otherwise).
Debt to Credit Ratio
People often make the assumption that low utilization of available credit will increase their credit score. This is technically true but needs to be defined further. The most common assumption is that if your utilization is below 30%, you’re in the clear. This is only true to the extent that utilization above 30% can hurt you. However, utilization of 29% is not necessarily a good thing. People alternatively assume that a 0% utilization is the preferred state yielding the highest credit score. This is also not true, because if you are not using credit (and therefore not engaged in repayment), scoring modelers have no risk to assess. Based on our observation, the optimum debt to credit ratio is between anything above zero and 10% on revolving accounts.
Authorized User Tradelines
I recently read an article (dated sometime in 2014), in which the author – or “protagonist” in this case – droned on with her opinion about whether or not authorized user tradelines will remain a viable technique to increase credit scores. She quoted news articles from 2007 in which the Fair Isaac Corporation considered removing authorized user tradelines from their algorithm. They have since announced their decision to remain scoring authorized user tradelines and a study by the Federal Reserve Board (2010) exhibited the effectiveness of authorized user tradelines as a method for credit score enhancement.
What does this matter?
At first, it seems like these are technicalities and may not have any real-world effect. However, consider the case of potential borrower unaware that his or her credit score is lower in reality than it appeared to him or her online. In this case, the potential borrower is set up for failure and his or her efforts may have gone to waste. Or, consider the case of someone charging up their credit cards to fit the mold of the supposed “optimal” debt to credit ratio, when in reality all they are doing is incurring debt. Lastly, consider the potential borrower that overlooks the powerful benefits of authorized user tradelines and misses their chance to increase their credit score and lower their interest rate on a 30 year fixed mortgage (which could cost them many thousands of dollars).