Credit scores might be widely feared for how they can derail a loan application (or even a job application), but for such a powerful number, they are widely misunderstood. Many people falsely believe that they have only one credit score, or that they share a credit score with their spouse, for example.
In the latest edition of her book, Your Credit Score, money guru Liz Weston aims to debunk those myths and explain how to clean up credit reports while raising scores. U.S. News spoke with Weston about what’s changed in the world of credit, and what consumers need to know. Excerpts:
Credit scores have been around a long time; what’s new about how they work?
I’ve revised this book twice before, but I’ve never had to do as much rewriting, revising and updating as I did this time. There have been some changes in how the leading formula, the FICO, works. There have also been huge changes in the laws regarding credit as well as how creditors use credit scores. One example is that creditors are now prohibited from raising your interest rates if you have trouble paying another lender’s account. But they’re also much stingier about offering lower rates, unless you have really sterling credit scores.
Have credit score become increasingly important to people’s financial lives?
Absolutely. In the third edition, which was published in 2009, I noted how we’re increasingly becoming a world of credit haves and have nots. That’s become even truer in the past couple of years. If you have great scores, you’ve had access to some of the cheapest loan in decades. Lenders are still falling all over themselves to get your business. You can get low mortgage and auto rates, zero percent teaser rates on your credit cards and astoundingly generous rewards cards. Everybody else, though, has had a rougher time getting access to credit.
And credit scores have influence beyond the world of borrowing. Most auto and homeowners insurers use credit information in setting premiums, because insurers discovered a strong connection between good credit and low claims costs. Landlords use credit scores as well to screen applicants. Employers typically use credit reports, rather than credit scores, to evaluate job applicants, but bad credit can trip you up there as well.
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What are the top misconceptions that people have about credit scores?
You know, the one chapter that didn’t require much change was the chapter on credit scoring myths! I would have hoped that in the decade since credit scoring information became more available, we could have put to rest at least some of those myths, but they’re still going strong. Two of the biggest ones are that you can improve your scores by closing accounts (you can’t, and you may wind up hurting them) and that checking your own credit reports or scores will hurt your numbers.
Can your credit history really influence whether or not you get a job? Are employers allowed to access that information?
Yes, your credit reports can affect whether you’re hired, fired or promoted. Six out of 10 private employers check the credit histories of at least some of their job applicants, according to a survey by the Society for Human Resource Management. Thirteen percent use credit checks for all their employees, whether or not the job has anything to do with money.
This is true even though there’s no evidence of any link between bad credit and theft or any other problem on the job. Only six states—California, Connecticut, Hawaii, Maryland, Oregon and Washington—restrict employers’ ability to check credit reports. That’s putting a lot of people in a terrible bind. They often have bad credit in part because they lost their jobs, but they can’t get another job because of their bad credit. If there were any evidence or research that proved people with bad credit are more likely to steal or underperform, then allowing credit checks might make sense. But there isn’t.
What’s the single most important thing someone can do to improve their credit score?
If you have a serious error on your credit reports—accounts showing as delinquent when you paid on time, or that don’t belong to you—getting those removed can have a dramatic, immediate positive impact on your scores. Short of that, though, the best way to improve your scores is to pay down (and preferably pay off) your revolving accounts, including your credit cards. Paying down any debt will help, but the FICO formula is especially sensitive to the gap between the credit you’re using and the credit you have available on revolving accounts. Paying that down can really boost your scores.