Credit Score Myths that Hold Buyers Back
Myth 1: "You should cancel your unused credit cards."
Reality: Old lines of credit are good for your credit score.
"The older the better" is a rule that applies to most lines of credit. Unused cards also decrease your "debt utilization" factor, which is the ratio of how much debt you use compared to how much you have available.
This means that while it's a good idea to not initiate new credit lines when you're about to go loan shopping, it's also helpful to hang on to old cards - even if you rarely use them anymore.
Myth 2: "You should pay off all the debt you can."
Reality: This varies depending on the borrower's situation.
Lenders typically need to see some cash reserves on hand in order to approve a loan. Well-meaning people sometimes disqualify themselves from buying a home just because they've used too much of their cash to pay off debts.
This might not even help their credit score significantly, and in some cases the monthly debt payment would not have created a problem with their loan approval.
Always check with a mortgage professional before making this type of decision when you're on the path towards buying a home.
Myth 3: "Higher income boosts your credit score."
Reality: Income does not affect credit scores.
Income
does obviously play a part in your ability to qualify for a loan, but it has no effect on credit rating.
Credit scores are based primarily on payment history, how much available credit is being used, and the average age of credit lines.
Myth 4: "You should use credit as rarely as possible."
Reality: Lenders want to see a track record of how you handle credit.
It may seem counterintuitive, but using no credit at all can actually hinder your ability to get financing. This is why would-be borrowers with zero debt sometimes run into hiccups when getting pre-approved for a home loan, even when they have large cash reserves.
Using a card to buy just one meal or tank of gas per month is usually enough to establish a credit history.
Myth 5: "You should always carry a credit card balance."
Reality: It's best to pay the entire balance off monthly.
A surprising number of consumers believe that it's better for their credit score if they make timely credit card payments while still leaving a balance on the card every month.
Experts say that it's best to pay cards off in full during the no-interest grace period. (But just a reminder: canceling a card after paying it off can actually hurt your score.)
Where to get a free credit report:
AnnualCreditReport.com is the only website explicitly directed by Federal law to provide free credit reports. (The report is not the same as your credit score.)
You can request one free report from each of the three big credit bureaus: Experian, TransUnion, and Equifax.
Where to get a free credit score:
Did you know that many credit scores advertised for sale online are not the FICO scores used by lenders?
You can visit MyFico.com to get a free FICO Score 8 from Experian. This will provide a good data point; however, mortgage lenders are more likely to use the FICO Scores 2, 4, or 5.
Tip: Make sure to choose the "Free" option if the free FICO Score 8 is what you're looking for.
Note: The "Premium" options on MyFico.com provide more reports from all three bureaus, but they also default you to a monthly paid subscription. Proceed with caution. :)
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