Five Surprising Facts About Credit Scores

Most people have a vague idea of how credit scores work. At a minimum, they might know that their debt payment history and other financially-related information is somehow plugged into a computer, and out pops out their credit score. This credit score quickly tells companies that provide you with credit how likely you are to pay them back, based upon the potential creditee’s previous financial history. However, things are really not that simple.

Here are the five surprising things about credits scores you probably didn’t know. In fact, some will probably shock you — they might just be the exact opposite of what you expect:

1. Your income does not have any direct effect on your credit score. You could be a billionaire, but have a very low credit score. Credit scores are based on information from credit agencies, but these agencies have no idea how much money you actually make! This means a billionaire can have a much lower credit score than the guy who cleans his pool.
2. Closing old accounts will probably lower your credit score. Your credit history is an important factor in your credit score, so closing old accounts (more than 1 year) will probably lower your credit score because it will remove that history from your credit report. It will also lower your credit ratio (the amount of credit you are currently using compared to the total amount of credit you have available to you). Even though you are trying to be financially responsible by closing these old accounts so you are not tempted to use them, this will probably cause a lower credit score!
3. Paying off collection agencies or other debt from more than two years ago won’t help you much. This one is pretty strange because it seems like the right thing to do, and in fact, paying down your current debt can definitely help out your credit score. However, credit scoring systems look at the last date of activity on your account, and if the collection (charge-off is how it’s usually called) is over 2 years old, it starts to lose its negative power. When you make that partial payment, guess what happens? The date of last activity clock resets to the day you make the partial payment on the charge off, causing your credit score to plummet! In this case it’s better to not pay anything, or negotiate a one time settlement with the collection agency in exchange for removing some of the negative info.
4. The entire credit agency system is comprised of and controlled by private companies that are regulated by the government. Credit agencies collect information about you for FREE from various companies that you do business with, and then resell the data back to other companies and to you. The government has never licensed these credit agencies to do this, but over time has started to regulate the industry. Remember that these credit agencies are public companies and are not government agencies. You could actually buy shares (become a part-owner of a credit agency) if you wanted to!
5. Timing is very important for credit scores. Most negative items lose their power on your credit score after 2-3 years. That is why we always teach our customers to focus their energies on recent, negative items first.

Credit scores are far from a perfect system, and can sometimes be determined in a way that seems counter-intuitive to you. Therefore, it is important to educate yourself as to how credit scores really work, so you will be able to make the right decisions to keep this very important number as high as possible.