Credit Score (or, FICO score): Top 10 Misunderstandings from Past Home Buyer Clients

In speaking with clients, there seems to be a lot of confusion surrounding credit scores and reports. I thought I would cover some of the most common:

1) Credit scores and reports are not controlled by the government. The 3 credit bureaus (Experian, Equifax, and Transunion) are companies that collect information about people in order to package and sell it to other businesses. FICO is basically a software company. Their software is what figures out credit scores. FICO sells this software to the 3 bureaus.

2) Credit scores are not part of the credit report. Credit scores are based on what's in the credit report. If the report shows that you always pay bills on time, then your score goes higher. If it shows that you pay late sometimes, then the score goes down.

3) You don't have a single credit report or a single credit score. All of the 3 credit bureaus keep their own credit report about you. They all calculate your score based on their version of your report, and they all calculate the score a little differently. Your score can easily be a 50 to 100 points different from one bureau to the next.

4) Credit reports are not perfect. There's no central computer that all the banks and credit cards are connected to. If you owe money to a company, they could report your payment history to one, all, or none of the 3 credit bureaus. According to the US Public Interest Research Group, as many as 25% of credit reports contain significant mistakes.

5) Credit scores are not set in stone. Since credit reports often have mistakes, these mistakes can be corrected to improve your score.

6) The lender can takes these things into account (except for "g"), but your credit score is not based on the following:

a) Occupation

b) Employer

c) Length of time at job

d) Things you own

e) How much is in your bank account

f) Age

g) Race, color, religion, national origin, marital status, or sex

7) Lenders do use your credit score, but they also consider other financial factors in approving a loan. This is important because one lender might say no and another will say yes. It happens everyday.

8) You don't necessarily need a credit repair organization to help you get incorrect information taken off your credit report. Under the Fair Credit Reporting Act, you have the right to personally dispute information in your credit report, and the bureaus must delete any mistakes.

9) You don't necessarily need a credit repair organization to help you improve your credit. According to Patrick Ritchie in the Credit Road Map: "Most of the advertisements we see and hear...are coming from debt settlement companies. You make payments and in return your money is held. Once the credit gets to the point where the creditors believe the debts will never be repaid, the settlement comes in. This results in a major blow to the credit of a consumer." In other words, the debt gets settled as promised but at the expense of your credit. The only way to improve your credit is to pay bills on time, pay off debt, don't declare bankruptcy, etc.

10) There's only one official website where you can get your free credit report. It's http://www.annualcreditreport.com.


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