Credit scores play a significant role in our lives. From renting an apartment, getting cable and utilities, to eventually securing a mortgage to buy a house, your credit score directly affects your ability to do these things. Since there are a lot of misconceptions about credit scores, it’s a good idea to first understand what factors make up that important number.
A credit score is based on the following five factors:
- Payment history
- Total amount owed
- Length of credit history
- Types of credit, and
- New credit
Now that we have covered what goes into a credit score let’s discuss 5 common credit score myths that potential home buyers face.
Myth 1: Debt is Bad for Building Credit
The word “debt” has an inherently negative connotation. When we hear it, we automatically think it’s a bad thing. Especially when speaking in terms of your financial situation. However, this isn’t necessarily the case when it comes to credit.
In fact, debt plays a vital part in the loan process as lenders will use the “debt to income ratio” when determining if you’re approved for a loan or mortgage. Therefore, it’s safe to say that having some debt actually helps you build credit in the long run.
Just remember, debt, like most things in life, is good in moderation.
Myth 2: Getting a Credit Report Lowers Your Credit Score
Not understanding the difference between hard and soft credit inquiries is why most people think getting a credit report lowers your credit score.
Soft inquiries are when someone runs a credit check for reasons unrelated to lending you money. So, in this case, getting a credit report is a soft inquiry, which does not impact your credit score.
A hard inquiry appears on your credit report when a lender checks your credit in response to an application for a new loan, credit card, or line of credit. This is the type of credit inquiry that could hurt your credit score.
Myth 3: Your Credit Score and Credit Report Are the Same
You might confuse your credit score and credit report with being the same, but they are definitely not the same.
Your credit report is a factual and historical account of your debts, loans, lines of credit, and payment history. On the other hand, your credit score is a singular number based on the information from your credit report that lenders use to assess your creditworthiness.
Myth 4: You Should Close Your Credit Cards Once You Pay Them Off
For those with old credit cards that are rarely used, it might seem like a good idea to close your credit cards once you pay them off. In reality, closing credit cards can hurt your credit score.
According to Forbes, “The main issue is it reduces your amount of available credit. Credit utilization is the ratio of your outstanding credit card balances to your credit card limits. It measures the amount of available credit that you are using – the lower the ratio, the better.”
Don’t forget that length of credit history is one of the five factors that determine your credit score. By closing out old credit cards that you’ve had for a long time, you’re shortening the average age of your accounts, which can reduce your credit score.
Myth 5: Once You Have Bad Credit, It Stays with You Forever
If you’re one of the millions of people who have fallen on hard times at some point in your life and now have less than a stellar credit score, don’t worry. It won’t stay that way forever. Here are some things you can do to help increase your credit score:
- Pay your bills on time
- Pay off debt
- Keep balances low
- Don’t close old credit cards
- Check your score regularly
- Don’t apply for too much new credit in a short period of time
Rebuilding your credit takes time and patience. Everyone forgets to pay a bill on time once in a while but making sure that you’re practicing responsible credit behaviors will help tremendously with your credit score. There are credit counseling programs out there to help you as well.
Still unsure if your credit score will be an issue when you’re ready to buy a house? Our experienced agents at aDoor Real Estate are here to help guide you through those tricky credit situations during your home buying process. Contact us today!