What is a Mortgage Credit Score?

Mortgage-Form1-150x150A new type of credit score, designed especially for mortgages, was released in 2012 by the Fair Isaac Corporation (FICO) in collaboration with data firm CoreLogic. This new type of credit score will serve as another tool that, together with the traditional FICO score, will help more people become eligible for a mortgage loan.

The FICO Mortgage Score Powered by CoreLogic will contain information that other credit bureaus, such as Equifax, Experian and TransUnion, don’t include in their credit reports. This should paint a complete picture of whether you are financially responsible or a risk for default. Information on your rent payments or child support payments will be included in this new credit report, and will be taken into consideration when determining your credit score.

Benefits of the Mortgage Credit Score

The developers of the new FICO Mortgage Score stated that its main purpose is to help more people become home owners, but critics say that it will only generate more inaccuracies and privacy problems. Some of the key benefits of this new credit scoring system are:

  • The mortgage credit score will help prospective home owners who don’t have a long payment history record, which is a large part of the traditional credit score. If you don’t have enough experience with other loans, such as credit card or car loans, then this new type of scoring can work in your favor.
  • Takes into account other on time payments. Nontraditional information, which wasn’t taken into consideration when determining your credit score in the traditional way, such as a payday loan that was repaid on time, can help you get a loan easier.
  • Recent events in the real estate market have made it harder for lenders to evaluate borrowers, so the new credit score will also benefit them by more accurately predicting mortgage risk. It is estimated that the FICO Mortgage Score can predict mortgage risk 7.5 percent more accurately than the old FICO credit score.

Disadvantages of the Mortgage Credit Score

As you are well aware, the traditional FICO credit scoring system comes with its pros and cons, and so does the new FICO Mortgage Score. Here are a few of its disadvantages:

  • Other issues will affect more heavily. Home buyers with problems, such as divorce, evictions, child support, or who bought a home before the economic crisis, will have a harder time getting a loan or rebuilding their credit, because the new credit score will accentuate their issues.
  • Unknown time frame for dispute resolution. It is unknown if consumers will have the ability to dispute and resolve any inaccurate information in their new credit report in a timely manner.
  • There is no guarantee that the new mortgage credit score will result in more loans being granted. Also, there are no guarantees that lenders will even use the new FICO Mortgage Score. Only smaller lenders have started using it, while big lenders are more concerned with sorting out loans with issues that they have already given out.

This new credit score may have benefits on paper, for now, but only time will tell if the new FICO Mortgage Credit Score will indeed help more people become home owners. The most important thing is for you to understand your financial situation, including your credit score, which can be the only thing standing between you and home ownership.

What Credit Score Do I Need to Qualify for a Mortgage?

Credit-150x150Buying a home through a mortgage loan involves many factors, one of the most important being your Fair Isaac Corporation (FICO) credit score. The credit score is a tool used by lenders to help them determine how much money they can lend to you and at what interest rates. Your credit score is included in a credit report, which is a history of all your loans and payments. As you have probably guessed, a good credit history means that your credit score will be high. If you have missed or late payments, that will lower your credit score and make you appear as a risk in the eyes of a lender.

What is a Credit Score?

The Fair Isaac Corporation (FICO) credit score is the most popular type of credit scoring system in the United States. Your credit score is a 3 digit number that is determined by using information in your credit report, such as payment history, amounts owed, and length of credit history. This number is used by lenders, such as banks or credit unions, as well as mobile phone companies, landlords, or insurance companies to determine if you qualify for their services.

There are three major credit agencies in the United States: Experian, TransUnion and Equifax. Each of these agencies use a slightly different algorithm to calculate your credit score, so checking with more than one of them is always a good idea.

You can get one free credit report per year by visiting AnnualCreditReport.com. Unfortunately, there is an extra fee involved in order to receive your credit score, as well. Credit reports might contain errors which will affect your credit score. You should always check your credit report for any erroneous data, and have it corrected by reporting it to the issuing credit agency.

Credit Score and Qualifying for a Mortgage

FICO credit scores range from 300 to 850. The higher the score, the lesser risk the lender is facing when granting you a loan. The lower the score, the more risk that you won’t receive the loan, or that you will approved with some pretty high rates. Not all lenders will require the same credit score to qualify for a certain loan, but you can use these score ranges to get a general idea:

  • No credit. Having no credit is a bad spot to be in when applying for a mortgage loan. You are seen as a high default risk by lenders, but the good news is that having no credit is actually better than having bad credit, because it allows you to qualify for loans designed for people with no credit.
  • Very bad credit. A credit score below 600 is considered very bad credit and it is, most likely, the worst situation you can find yourself in when deciding to become a home owner. It is very difficult to be approved for a mortgage loan without a co-signer or a very large down payment when having very bad credit.
  • Bad credit. A credit score in the 600 to 650 range is considered bad credit and, like in the case of very bad credit, it would be extremely hard for you to qualify for a mortgage loan.
  • Fair credit. You are seen as a moderate credit risk by your lender when you have a credit score in the 650 to 700 range. A fair credit will qualify you for fairly decent rates, but you won’t have access to any special packages or the best rates.
  • Good credit. A credit score between 700 and 750 is considered good credit and will allow you to qualify for better rates and terms.
  • Very good credit. People with credit scores in the 750 to 800 range are regarded as low risk by lenders, and will qualify for some of the best rates and options available.
  • Excellent credit. Someone with no negative data on their credit report, and a long and spotless credit history will have a credit score of over 800, and will have access to the best mortgage loan deals and rates available from most lenders.

Having a lower score can be frustrating, but credit score is ultimately your responsibility when you consider becoming a home owner. Improving your credit score takes time and patience, so prevention is the key. Making payments on time and not borrowing more than you can repay will ensure that, when the time comes to apply for a mortgage, your credit score will be favorable and you will receive a good deal, saving you lots of money.

How Your Credit Score Affects Your Mortgage

HOw-Credit-Scores-Work-150x150Most people come to a point in their lives when they decide to stop paying for rent or living with their parents; they decide to become home owners. Qualifying for a mortgage loan and receiving the best rates depends heavily on your credit score. Lenders will decide whether to lend you money or not, what type of mortgage you can apply for, and what your interest rates and fees will be based on your credit report. Understanding how your credit score affects a mortgage loan can save you thousands of dollars over the life of the loan.

How is Credit Score Determined?

The Fair Isaac Corporation (FICO) score is the most widely used scoring method. Some lenders may use other scoring methods, but FICO is the most popular. The FICO scale ranges from 300 to 850, with most people being in the 600 to 800 range. A credit score of 720 and above is considered a good credit score and it will be the most advantageous when shopping for a mortgage loan.

There are three major credit bureaus in the United States, Equifax, Experian, and TransUnion, and they each use a different scoring method: Equifax uses the BEACON method, Experian uses the Fair Isaac Risk Model, and TransUnion uses EMPIRICA scoring. That means that your credit score could vary from one credit bureau to another, because each method uses different algorithms.

Your credit score is determined by using data in your credit report, such as your payment history, debt owed, length of credit history, new credit, and types of credit used. Any negative information, like late payments, will lower your credit score, but positive info, like getting back on track with your monthly payments, will improve it.

Credit Score Effects on Your Mortgage

Lenders consider many factors, such as your employment status, your savings and salary, or your debt-to-income ratio, when considering giving out a loan. But the most important factor, the one who will have the most influence on what rates you will receive, is your credit score. Also, having a credit score below 620 will make it very hard for you to secure a mortgage. Let’s look at how various credit score ranges will affect your mortgage loan.

  • A credit score of under 620. This low credit score will make you fall into the subprime category. A few years ago, you could have qualified for a subprime mortgage with a credit score this low. A subprime mortgage featured high interest rates and not so great terms, but it was an option. Nowadays, very few lenders still offer subprime mortgages, and are very hard to find. A way out if you have a credit score lower than 620 is by making a large down payment, as large as 50 percent of the loan cost.
  • A credit score in the 620 to 760 range. Lenders will consider you credit worthy with a credit score in this range, but they will offer you their standard loan options, meaning you won’t receive any deals or special packages.
  • A credit score in the 760 to 850 range. This is considered top tier credit score and will yield the best mortgage deals. You will receive the best interest rates and the lenders will give you the most mortgage loan choices.

The most important part of your mortgage loan that the credit score will affect is the interest rate. You might not feel it as much month to month as you are making your payments, but even a small 1 percent difference in your interest rate can add up to thousands of dollars over the life of the loan.

Your credit score is used by lenders to predict your default risk. The more at risk you are, the more your mortgage will cost, so FICO scores are necessary in order to protect lenders. The good news is that you can improve your credit score, which will improve your mortgage terms, saving you money. Before applying for a mortgage loan, make sure that your credit score is in a favorable range. That will make your life much easier, and get you one step closer to your goal of becoming a home owner.

How a Mortgage May Hurt Your Credit Score

credit-fico-score-150x150Becoming a home owner is a dream come true for most people. Unfortunately, you will usually have to apply for a mortgage in order to become a home owner. Mortgage loans come with advantages and disadvantages. One of the main disadvantages is that your credit score may be damaged during the home buying process. To become eligible for a mortgage loan and receive the best rates from your lenders, you will have to make sure that your credit score is high enough. After you have bought a house with a mortgage loan, you may want to buy a car or apply for a new credit card. But that may prove more difficult than before, as a new mortgage could lower your credit score. There are three ways in which buying a home by taking out a mortgage loan can hurt your credit score.

Credit Score Inquiries

When applying for a mortgage loan, you will be scrutinized carefully by possible lenders. They will look at your employment status, your salary, your debt-to-income ratio and, most importantly, at your credit score. Your credit score will make the difference between receiving a low interest rate, a high interest rate, or no loan at all.

The lender verifies your credit score by pulling your credit report. The consequence of having your credit score checked by a lender is a drop of 5 or less points. These inquiries will also be added to your credit report, where they will remain for two years. Your credit score will decrease whether you were approved or rejected for the mortgage loan.

New Large Debt

A new mortgage loan will be added to your credit report as a new large debt, which will decrease your credit score significantly. Applying for a new loan or a credit card after you have taken out a mortgage loan will be difficult, as most lenders will consider you a bigger default risk.

The good news is that, even if this score drop will be quick and significant, your credit score will come back to its initial value within six months after taking out the loan, with the condition that your monthly payments are made on time, you keep your account balances low, and take out new loans only if it is absolutely necessary.

Late or Missed Monthly Payments

Repaying a mortgage loan is a big responsibility, and late payments can have a large negative impact on your credit score. Even worse, missing payments can result in losing your home to foreclosure, as has happened to many people in recent years.

Payment history represents 30 percent of your credit score, and a large part of your payment history is represented by your mortgage. Because the mortgage loan is such an important part of your payment history, even a couple of missed monthly payments can lead to a large decrease in your credit score.

You should know that, while a new mortgage loan may decrease your credit score, this is usually only temporary, and your credit score will recover or even increase after a few payments are made on time. So, in the long term, a mortgage will actually be beneficial to your credit score, provided that you make monthly payments on time and don’t miss any.

Mortgage loans and credit scores are closely related. It is your duty, as a prospective home buyer, to know and understand what your financial situation is, and act accordingly. Taking out an affordable mortgage loan and making payments on time will make the mortgage work to your benefit, and even increase your credit score over time.

Effect of Paying Off Your Mortgage on Your Credit Score

Credit-Score-150x150 (1)Your credit score is the most important factor when it comes to a mortgage loan. A low credit score can make your mortgage a lot more expensive than it needs to be, and can even prevent you from being granted a loan. Applying for a loan when you have a good credit score will guarantee you better deals from the lenders. A lower interest rate will make a huge difference over time, meaning that you will save money and make the overall cost of the mortgage loan much cheaper. But you should be aware that this goes the other way around, too. Your mortgage will actually affect your credit score both in a positive and negative way during and after the repayment period.

How a Mortgage Affects Your Credit Score

A mortgage loan is your best friend at the point in life when you decide to become a home owner. Unfortunately, there are many factors involved in the mortgage process that will influence how much money you are going to have to pay for your new home. There is a very close relation between your credit score and your mortgage and, before we talk about what effects paying off your mortgage loan has on your credit score, let’s see how a mortgage affects it from the beginning.

  • Even before you are granted a mortgage loan, your score will have to suffer a little. This slight decrease of maximum 5 points in your credit score happens because the lender that considers giving you a loan will have to pull your credit report in order to check if you are qualified for a loan. Each time your credit report is checked by a lender, your credit score is affected.
  • You will notice a credit score decrease immediately after you buy a home using a mortgage loan. This decrease might be significant, and it happens because your mortgage loan will be added to your credit report. A mortgage loan is regarded as a large debt, and it will lower your credit score. You might encounter difficulties if you plan on applying for a new loan or credit card right after you have been granted a mortgage loan, because most lenders will consider you a risk for default.
  • Six months after you are granted a mortgage loan and suffer the inevitable decrease in credit score, your score should bounce back to its original value. The only condition is that you make your monthly mortgage payments on time and don’t miss any.
  • Your new mortgage can also have a positive effect on your credit score. Being responsible and making your payments on time reflects positively on your credit score, and will increase it slowly over time.
  • If you stop making payments on time, or, even worse, if you stop making payments at all, your mortgage will have a large negative effect on your credit score. Your credit score could plummet by at least a hundred points in this case and you could go from a perfect credit score to a bad credit score in just a few weeks.

How Paying Off Your Mortgage Will Affect Your Credit Score

Whether the effect of paying off your mortgage will be positive or negative on your credit score depends on your individual circumstances. Your credit score may increase or decrease, but this effect will be minimal, and will be outweighed by the fact that you will be getting rid of your monthly mortgage payments. Another advantage of paying off your mortgage loan is that you won’t be running the risk of missing or being late with a payment anymore, which would put a large dent in your credit score.

Paying off your mortgage can increase your credit score if your ratio of available credit to what you have utilized is acceptable. Not using a lot of your available credit will put you in a favorable light, but the credit score increase will be a lot lower than if you paid off a credit card. It is actually recommended that you pay off your credit card loans before your mortgage loan, if you wish to increase your credit score. The positive effect that paying off your mortgage will have on your credit score will be minimal if your credit score is over 700, and insignificant if you have an excellent credit score, of over 760.

Paying off your mortgage can decrease your credit score in the case that your mortgage loan is the only type of installment loan that you have. FICO counts each variety of loans that you have as 10 percent, so your credit score will lose a few points if you pay off your only installment loan. This decrease will be minimal and can be countered by having a pristine payment history for a long period of time, or by taking out a new installment loan, such as a car loan.

Some experts believe that paying off a declining asset is not a good idea, and the money should be used to pay off other outstanding debts, such as credit cards. If, however, you have considered all your options and money is not an issue, then getting rid of those monthly payments might be a good idea. Paying off your mortgage will have a minimal effect on your credit score, so it should be a fairly easy decision to make.

The Foreclosure Process

foreclosure2-150x150Have you experienced financial difficulties to the point of not being able to make payments on your mortgage? These things happen, and while they are less than ideal, there are always solutions. Often times you will be given a grace period to try and sort through your payments. If this doesn’t work, a short-sale will probably be your next option.  Foreclosure will most likely be one of your last options- read on to learn what a foreclosure is and how it works.

What is a Foreclosure?

A foreclosure is the process by which a homeowner’s property rights are forfeited as a result of failing to pay the balance on a mortgage loan. A foreclosure is generally a last resort whose need arises when you are unable to short sell your house or pay the outstanding debt through any other means. Normally, it will be sold through a foreclosure auction. In case a sale isn’t made through the auction, the ownership of the home reverts to the lender.

When taking out a mortgage, the borrower signs a deed of trust that puts a lien on the acquired property. This makes the loan secured, so ownership can legally revert to the lender in case the borrower fails to make payments on the property on time. If a lender does not ask for any collateral, then this becomes an unsecured loan. The lender of an unsecured loan can take you to court in case of default but he cannot forcefully collect any money from you.

Most lenders prefer a secured loan because if you default on the payments, the lender can seize your property and recover the balance owed.

The Foreclosure Process

There are five major steps in the foreclosure process, including:

1.    Notice of missed payments

It is always expected that you make payments on time. However, the lender, in most cases, will allow a 10-day grace period. If you don’t make the payment after these 10 days then the lender will issue you with a notice of a missed payment. This notice asks you to send the payment ASAP to avoid legal action. If you happen to send the payment to the lender after issuance of this notice, then you may only suffer a penalty and negative feedback on your credit report.

2.    Notice of default

If you fail to make a payment for a period of more than 30 days, the lender will issue you with a notice of default. This is a silent way of telling you to pay up or a different action will follow. The notice of default includes information about the property, your name, the amount that you owe the lender, the number of days that have passed since the payment was due and a detailed statement outlining the terms and conditions of the mortgage that you signed with reference to payment timelines. Depending on the terms of the lender, the notice of default may explain that further measures will be taken if an action is not taken by the borrower. While some notices of default are friendly, others can be quite harsh. The most common action after a notice of default is a foreclosure.

3.    Foreclosure notice

A foreclosure notice follows if you don’t respond to the notice of default in a manner that convinces the lender you will pay. The foreclosure notice tells you that the bank is on the verge of initiating foreclosure proceedings. Depending on your location, you have 30-120 days to work a deal with the lender through a short sale. If the borrower pays off the balance on the mortgage then the foreclosure is dismissed. However, foreclosure commences if you fail to make the payments. The notice includes the amount due, the interest rate, the name of the lender and the contact information of the lender’s attorney.

4.    Auction

When the default has not been remedied at the end of the set timeline, the lender will proceed to sell your property through a foreclosure auction or a trustee sale. The auction can take place at the county courthouse, at a convention center, at the office of the trustee or at the scene of the property itself. The property is sold to the highest bidder at the fall of the hammer. Since many people don’t manage to pay cash on the spot, the bank and the highest bidder may enter a deed of lieu for foreclosure. In other cases, the lender may buy the property back.

5.    Post-foreclosure

If the auction is not successful then the ownership of the property reverts back to the lender. This is referred to as real estate owned or bank-owned property. Such properties can be sold either through a local real estate agent or in the open market. Other lenders may prefer to sell their property at liquidation auctions, convention centers, or in auction houses.

A foreclosure is a last-resort option only when all other of the other options have failed. It has the disadvantage of hurting your credit score for a period of at least 7 years and will make it difficult to deal with future mortgage loans. Be sure to exercise all of your options before resorting to a foreclosure. If you do end up with a foreclosure, stay positive as there is always light at the end of a tunnel. Your credit will eventually bounce back and you will be able to learn from the past and move ahead. Here are some other resources that may help you in periods during and after financial issues: Top 6 Mortgage Lenders for Borrowers with Bad Credit, Improve Your FICO Credit Score, and Top 10 Steps for Getting a Post-Bankruptcy Loan.

 

 

Top 10 Components for Maintaining a Good Credit Score

images (9)A good credit score is invaluable, especially with the state of our economy. If your credit score is less than acceptable, then landing a loan deal might be as hard as finding a needle in a haystack. Denying those with poor credit scores has been a trend with many lenders; they do so in order to minimize losses as a result of higher default rates being associated with lower credit scores. Typically, a low credit score is synonymous with poor financial management and an inability to make monthly payments in a timely manner. So it is very important to do what you can to have a good credit score as you will have access to a variety of much better loans and rates.

Importance of Good Credit Scores

  • Low interest rates. Lenders always compete for borrowers with a good credit score. Many lenders will attempt to entice you their offers of low interest rates– the golden rule is “the higher the credit score, the lower the interest rate”. This is a sign that the down payment for a loan will be lower and you will also be able to complete repaying a loan within a relatively shorter period of time.
  • Employment opportunities. Owing to the litigation costs associated with defaults, employers are constantly screening the credit scores of candidates before hiring. Employers are also interested in hiring employees who demonstrate a high degree of financial responsibility because this means they will not misuse the company’s resources.
  • High purchasing power. This is perhaps the biggest advantage of having a good credit score. You easily gain access to a variety of loan products with a large credit limit on each of them. Ideally, you can spend a relatively small amount of money on a car, expand your small business, buy a better home or send your child to college.

Components of Maintaining a Good Credit Score

Good credit scores, unlike the weather, are not controlled by Mother Nature or fate. Thus you must employ a formula to help you garner the highest possible credit score. The components below, among others, will help you to maintain a good credit score.

  1. Don’t hit the credit limit. Hitting the roof of your credit limit can badly damage your credit score. One way of maintaining a good credit limit is to set a credit limit target, say 50%, beyond which you will not spend.
  2. Control all your debts. Your credit always reflects all of the debts you have, from mortgages to consumer loans. They may strain your overall budget or create an imbalance in your income and expenditure equation, leading to more trouble. Controlling all of your debts will positively be reflected on your credit score.
  3. Make payments on time. Perhaps the best technique for maintaining a high credit score is the regular and timely payment of your credit card debt. A single missed or late payment can have an effect on your credit score negatively in addition to penalties.
  4. Don’t close old credit cards. Your credit history contributes to about 30% of your credit score. Closing old credit cards means deleting your credit history—which lowers your credit score. Even if you don’t use them regularly; keeping them open enables you to have a stronger history.
  5. Maintain few credit cards. Every time you apply for a new credit card, your credit score is negatively impacted. You should therefore maintain as few credit cards as possible. A single inquiry may even take some points from your credit score, depending on the nature and amount in question.
  6. Check your credit report regularly. All three credit bureaus entitle customers to a free copy of their credit report from annualcreditreport.com annually. Since human systems make errors, check for credit limits that have been underreported, loan amounts that have been over reported and delinquencies that have been misrepresented. Requesting correction from the credit bureau will help you maintain a good credit score.
  7. Use your credit card. You credit history contributes to about 30% of your credit score. Failure to use your credit will therefore mean a poor credit history. A golden tip is to borrow and then repay regularly. For instance, you can borrow and repay after a week or a month.
  8. Avoid credit fatalities. Public record issues such as bankruptcies can have an impact on your credit for about 7 to 10 years. Making too many credit inquiries can also kill your credit score. Since only time can repair this, the best way to maintain a good credit score is to avoid bankruptcy at all costs.
  9. Select and use your favorite credit card frequently. FICO has established a model that penalizes you heavily when you have multiple balances. However, you can limit this by concentrating a bulk of your spending efforts to a single credit card. In the meantime, you can use the other credit cards on an infrequent basis, like once every three months. Failure to use your other credit cards reduces your credit score while closing them down kills your utilization ratio.
  10. Check the behavior of your actions with the FICO simulator tool. FICO provides a free simulator tool which shows you how your score behaves when you undertake particular actions. This tool will intelligently inform you when you need to repay more debt, change your loan type, or take out a new loan.

Following these tips will surely help you to maintain a good credit score. And with high credit scores, you will be on the road to low insurance rates and low or no security deposits. Be a guru in sound financial management today by striving to maintain a high credit score!

How Your Credit Score Is Calculated

credit-score-150x150The most common way of how your credit score is calculated is by creditors using the FICO method. The Fair Isaac Company developed the FICO score calculation as a way of enabling lenders to assess the risk a borrower has in terms of being lent money. While the exact details of how the FICO score is determined are kept secret by Fair Isaac, the basics of how your credit score is calculated involves attributing different weights, as expressed by percentages, to your past and current financial activities as follows:

35% Bill Paying History

The biggest percentage of the FICO calculation goes to how well you paid your bills in the past. This section also takes into account any bankruptcies filed. Your current bill payment habits are stronger than your past paying history in how your credit score is calculated, but all of that still counts. If you have kept your payments up to date in recent months or years, but not in the past, this will create a stronger score than if it’s the other way around.

30% Amount Of Debt

When applying for a new loan, the amount of outstanding debt you have will be taken into consideration. Lenders want to make sure you will be able to make the payments on a new loan. The more debt you have outstanding, the lower your FICO will be. Keeping up with your balances and payments will help determine how your credit score is calculated.

15% Length Of Credit

Lenders want to see a long track record of you paying your bills on time. A borrower who has made each payment, but has only had credit for a short time, will receive a lower FICO score than someone with a longer record of consistent bill paying. Having long-standing accounts with payments consistently made is favorable for lenders and this will increase your FICO score.

10% Number Of Credit Applications

Many people do not realize that just applying for loans can affect how your credit score is calculated. If lenders see a history of a large number of credit applications, it makes them think that your finances are not stable. Each time you apply for credit, it gets added to your report as an “inquiry.” Too many credit inquires will lower your FICO score.

10% Credit Mix

Different types of credit are considered by lenders as favorable as the mix shows your versatility in paying off what you owe in different financial areas. Keep in mind that your income and employment aren’t included in how your credit score is calculated. Rather, it’s the types of credit you’ve had and how well you’ve handled these by producing timely payments.

Once you understand how your credit score is calculated, you may be able to rethink how you treat your finances to give you the best reputation with creditors as possible in case you need a loan in the near future. As you can see by the weighted system of FICO, paying your bills on time and not having an overload of debt are the two most important objectives in maintaining a good credit score.

Top 10 Credit Score Myths

credit score myths- 150x150Having a good credit score is very important to both the borrower and the lender. How much you can borrow and what your interest rates will be largely dependent on your credit score. It may not sound like a lot, but paying 1 to 2 percent more on an interest rate will make the overall cost of the loan go up by a few thousand dollars. Also, there is a chance you won’t be able to borrow as much as you hoped if your credit score is less than perfect. Another negative side of having a bad credit score is that more and more employers use credit reports to evaluate applicants. In this economy and job market, having a good credit score is important. It is also important to learn about your credit score and mortgage approval.

Credit Score Myths

To have a perfect credit score is not the only thing that matters. Holding on to a high score is also important, but, with all the factors that influence credit scores, you will find that it is not as easy as it may seem. While credit score is affected by a lot of things, there are also some myths regarding what’s good and what’s bad for your credit score. Here is a list of the top 10 credit score myths that have been circulating around for years:

  1.  Too many inquiries will hurt my credit score. Checking your credit report will not hurt your credit score. When you pull your credit report, this is seen as a “soft inquiry” and it will only show on a personal credit report. However, when a lender checks your credit report, this is considered a “hard inquiry”, which will be added to the report and will affect your credit score. Checking your credit report for yourself is actually encouraged because it will help you manage your finances better. You can get a yearly free credit report on websites like annualcreditreport.com.
  2. Paying my debts will result in a higher credit score immediately. While paying off your debt is encouraged in order to increase your credit score, this will not happen instantly. Closing your accounts, on the other hand, can hurt your credit score. A very important factor in credit scores is the relationship between the total balance and the total credit limit. The increase in your credit score after you pay off your debts will largely depend on your credit history.
  3. My credit score is perfect because I haven’t done anything wrong. While it is logical to think this way, this may not be true at all. It is estimated that 70 percent of all credit reports have errors in them, and that may lead to a lower credit score. If you encounter any errors on your report, it is your right to contact the issuer and demand that they are fixed.
  4. My credit report looks good, so I shouldn’t be worried. If you have checked your credit report and think that everything looks good, keep in mind that there are actually 3 national credit reporting agencies: Experian, Equifax and TransUnion. If you have only checked one of them, there is still a chance that there might be errors on one of the others.
  5. Not using my credit cards will help my credit score. Using your credit cards to pay for things like groceries, gas, or utilities will demonstrate to the lender that you are responsible with managing your credit. This takes some discipline, but using credit cards will help you build positive history which will, in time, increase your credit score and ensure that you are offered the best terms and interest rates when applying for new services.
  6. My credit score is influenced by how much money and assets I have. Because credit reports don’t show bank account balances or your assets, these numbers won’t influence your credit score. They will, however, show if you are not making your monthly payments on time or if a bank has turned over the balance that you owe to a collection agency.
  7. Credit counseling will lower my credit score. Credit counseling doesn’t influence your credit score, but the fact that you have been in counseling will show up on your credit report. This may not look good in the eyes of a lender, but they will be more interested in your monthly payment history.
  8. A low credit score won’t prevent me from being hired. Companies in some industries require a credit check before hiring in order to prevent application fraud. Your written permission is required before the employer can pull your credit report, so you will have the chance to explain any issues that might come up.
  9. A good credit score allows me to borrow a lot. You should always borrow only as much as you need and as little as possible. The amount that you owe and the credit that is available to you is considered by the credit score. Hitting a credit card limit will negatively affect your credit score.
  10. My race, gender, marital status, religion, or education level can affect my credit score. Under the Equal Credit Opportunity Act, your credit score cannot be based on any of the above. Also, this information will not show up on your credit report.

It is very important to keep an eye on your credit score, know what affects it and what doesn’t, and what your rights and limitations are. Credit score myths can lead to very expensive mistakes, so recognizing them will help you avoid a lot of trouble, some which may even take years to resolve. Now, you may want to check out this helpful related article on getting pre-approval for loans.