California Credit Law Blog

How do consumers get the best deal on credit? Most people know that furnishers--the lenders that supply credit--look at consumers' FICO scores. The higher the score, the better deal the consumer will get. That means a lower mortgage rate or a more favorable interest rate on a new car.

But how can consumers increase their credit score? A recent article debunks some of the more common myths about how consumers' credit scores can be affected.

1) Closing Accounts Do Not Help Your Credit Score! Credit scoring formulas look at the difference between consumers' available credit and what they are using. So, for example, if a consumer has four credit cards with $10,000 limits and has maxed out all four, that means the consumer has no available credit and $40,00 in credit they are using. That person's credit score will be much lower than someone who has the same cards but only a $1,000 balance--leaving $39,000 in available credit. Closing credit accounts will shrink the available credit, thereby lowering the score.

2) Checking Your FICO Score Will Not Hurt Your Credit! What exactly is a FICO score, anyway? All three of the credit bureaus, Equifax, Experian and Trans Union, offer FICO credit scores using the formula developed by Fair, Isaac. But each bureau labels the scores differently, adding to the confusion. Equifax calls the FICO the Beacon credit score. TransUnion calls it Empirica. Experian names it "Experian/Fair, Isaac Risk Model."

Whatever it's called, checking your own credit report will not affect your score. And multiple inquiries from potential lenders for the same thing--for example, if you're shopping for a car loan or a mortgage--won't hurt you, either. Just make sure to do your shopping efficiently, since the FICO score treats multiple inquiries in a 45-day period as just one inquiry.

3) Credit Counseling Will Not Hurt Your Score As Much As A Bankruptcy! Many consumers are afraid to try credit counseling to handle outstanding credit that they find impossible to manage. Credit counselors will often work out arrangements with credit furnishers in which consumers pay lower balances over time. These arrangements will adversely affect your credit, because you are essentially making your payments late. If you're current with your debts, it's probably a good idea to avoid credit counseling. But sometimes a good credit counseling agency is the best solution to get credit-troubled consumers back on track.

4) You Need to Check More Than Just Your FICO Score! Consumers should be sure to check their scores from all three credit bureaus before applying for at big loan like a mortgage. Many mortgage lenders take the middle score from the three bureaus when evaluating your credit, so consumers should fix any problems in all three reports before shopping for a loan. Consumers can order all three scores here.

The bottom line is pretty simple. Don't use or apply for more credit than you need; pay your bills on time; and correct any errors in your credit report.