A recent study finds a lot of people don't understand how a credit score works. What makes it go down, what makes it go up and why it all matters anyway. Among many findings, the Consumer Federation of America says two-thirds of people surveyed didn't know how costly a low credit score can be. And boy, can it cost you. Score low and the higher interest rates you'll pay on loans and credit cards can cost you thousands of dollars more every year. So how do you earn a high score? Don't buy into these myths.
Credit Score Myth #1:
CANCELING CREDIT CARDS OR MOVING ALL OF YOUR DEBT ONTO ONE CARD WILL BOOST YOUR SCORE. Financial education expert Gerri Walsh at FINRA says "if you're cancelling all your credit cards, that can hurt you because some of the other factors that go into a credit score include the ratio of credit you have available compared with the amount that you owe and then also the length of time that you've had credit cards." A high credit score boils down to your history of responsible credit card behavior. That's why paying for everything with a debit card of cash is also a bad idea.
A BANKRUPTCY IS A CURE-ALL FOR CREDIT PROBLEMS:
"Bankruptcy is going to hurt you in the long-run," says Walsh because "it does not make all debts go away, notably student loans." Consumers need to know that a bankruptcy stays on your record for seven years. Walsh says "it will haunt you if you look for a car loan. It will haunt you if you look for a mortgage."
YOU CAN PAY SOMEONE TO FIX YOUR CREDIT SCORE.
Walsh says "in many ways that is one of the worst myths out there." She says "there are national credit counseling organizations that are there to help you figure out how to get a handle on your debt. But, if you're thinking that you can pay someone for a quick fix, think twice because it won't work." Bottom line, if an offer from a credit counselor seems too good to be true, it probably is.
At the end of the day, all of your credit history gets crunched into your credit score. Your FICO score is the most commonly used number. This is how it is calculated; payment history represents 35 percent of the weighting, amounts owned is 30 percent, followed by the length of credit history and new types of credit used.