Common Credit Score Myths

Mortgage lenders rely heavily on applicant credit scores, but unfortunately, some mortgage lenders are circulating misleading or incorrect information involving the role of your credit score in the application process.  If you have plans of purchasing a house, make sure you are armed with the correct information that will improve your potential for a mortgage at the best rates.

Myth #1: Closing Accounts Will Help Your Credit Score

If your mortgage broker tells you to close your accounts in order to help your credit score, run away and find a new mortgage broker!  Closing accounts actually does not improve your score, and it may actually hurt it.  The reason this is so confusing is that it is true that having too many open accounts hurts your credit score.  So it seems to make sense that closing some of the accounts should only serve to improve your score!  Unfortunately, when you open the accounts- that is when the damage begins.  Closing a few accounts can make it worse.

Why?

Your credit score will take into account the difference between how much money you have available to you and how much you actually use.  In other words, what is the balance of the money you owe on all of your accounts in comparison to the amount you would owe if you maxed out all of your credit?  When you close accounts, the amount of money you have available to you is smaller, and your balances will look much larger in relation to what you have available to you- and this is why your score will be lower when you start closing accounts.

Myth #2: Checking Your Credit Score Hurts Your Credit

Obtaining a copy of your credit report containing your credit score does not count against you or affect your credit score.  In fact, you are entitled to one free copy of your credit report annually- as it helps you make sure information is being reported accurately, and gives individuals opportunity to correct any errors that may be on their report.

What does hurt your credit score is having numerous inquiries by credit card and loan lenders- as it shows you are somewhat desperate and looking for financing from any company willing to give it to you!

When you are mortgage shopping- a good tip is to do it in a short period of time.

Why?

The FICO score treats a series of inquiries made within a 45 day period as a single inquiry.  The FICO score will actually ignore inquiries made within 30 days of the score being computed, so if you want to check what rates you could get on a mortgage from 6 different lenders- do it in the same month and it will not affect your credit score much since it will only be counted as a single inquiry!  In most cases, a single inquiry takes about 5 points off a person's credit score.

Myth #3: Credit Counseling Affects Score Like Bankruptcy

This couldn't be further from the truth!  The creators of the FICO scoring system, Fair Isaac Corporation, compiled statistics that shows people who obtain credit counseling do not default on their debts more than a person who is not receiving credit counseling.  The FICO formula currently used to obtain a credit score does not make any reference or adjustment for credit counseling.

If the credit counseling program you're involved with allows you to make smaller payments to your lenders, your current lenders might actually report you as late to the credit reporting agencies- which will affect your credit score negatively.  It is not the actual reference to credit counseling that hurts you, it's the fact that individuals often make smaller payments to their creditors when part of a counseling program that causes the decrease in credit score.