Seven Myths About Your Credit Score
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- Kirk HaverkampDecember 06, 2011 - MortgageLoan.com
Having a good credit score is important, particularly if you’re planning to apply for a mortgage loan, a refinance or other type of consumer loan. But there’s a lot of confusion over just what affects you credit score.
Paying your bills in a timely manner is the big one, obviously. But beyond that, things can get kind of murky. The following are seven of the more common misconceptions about consumer credit scores and the things that affect them.
1 – Carrying a balance on your credit cards helps build your credit.
Actually, it doesn’t. The credit rating agencies are just interested in whether you are meeting your debt obligations and for how long you’ve been doing so. Having a credit card you never use for 10 years is just the same as running up and paying off debts routinely over the same period – in each case, the report simply shows the account is in satisfactory status with no history of missed payments.
Carrying a balance can actually hurt you if the amount is too high, even if you’ve been faithfully making payments. Using more than 30 percent of your credit limit on any revolving credit account (like a credit card) will lower your credit score, so you want to keep the balance on any individual card below that level.
2 – Closing accounts will help/hurt your score
The odd thing about this myth is that you’ll hear both sides of the same question. The truth is, closing accounts doesn’t do anything to your score, at least not right away.
The idea behind closing accounts to boost your credit is that it hurts your score to have too many lines of credit open, because you could go on a spending binge and max them all out in a short period of time. In reality, that’s not going to be an issue unless you’ve got a bunch of accounts you’re carrying a significant balance on – but that’s a problem with too much debt, not too many credit cards.
The flip side – that closing accounts can hurt your credit – has some truth to it, since eventually those accounts will drop off your credit record and will no longer show a positive credit history in your favor. But the notion that closing accounts hurts your credit score by reducing the total credit you have available simply isn’t true.
3 – Late payments will hurt your score
A late payment is not the same as a missed payment. There’s a misconception that any time your mortgage servicer or credit card company hits you with a late fee, your credit will get dinged as well. In reality, a lender won’t report you until the payment is 30 days late – one monthly billing cycle – a which point it becomes a missed payment, and not merely a late one. Missed payments are the killer.
Something to note: Most mortgages allow a 15-day grace period in which you can still make your payment without incurring a late fee. Just remember that the 30-day clock on missed payments starts at the beginning of that period – your official due date – and not at the end of the grace period.
4- Making utility payments on time
It’s frustrating to many who are just establishing their credit, but timely utility payments – for gas, electric, cable TV, phone bills – do nothing to boost your credit. They’re not reported to the credit agencies, which are primarily interested in how you handle loan obligations.
At the same time, missed utility payments can definitely hurt your credit if the debt is ignored long enough to be referred to a collection agency. That will show up on your credit report, so it’s best to resolve any billing disputes before they reach that point.
5 – Checking your credit score lowers it
It used to be that the only way to find out your credit score was to apply for a loan – which would depress your credit score, at least slightly, since you’re seeking to borrow money. These days, however, you can order your credit score from the credit scoring companies (although Experian won’t directly provide your actual FICO score, but only an alternative) and it doesn’t count as a hit.
What will lower your credit score, at least temporarily, is opening new accounts. That’s a sign you’re taking on more debt. As a result, you should try to avoid doing things like buying a new car or opening new retail cards or other credit cards if you’re planning to apply for a mortgage loan or refinance in the near future.
6 – Your income affects your credit score
While your income may affect your ability to get a loan, it doesn’t affect your credit score itself. Your income and credit score are two separate things a lender looks at when you apply for a mortgage or other type of loan. Your loan application may be denied if the lender isn’t convinced you make enough for the amount you want to borrow, but that’s a different matter from your credit score, which is supposed to be an assessment of how well you handle your debts regardless of income.
7 – You can get your credit score free of charge once a year
Actually, it’s your credit report – the listing of all the things that affect your credit score – that you can get once a year, but not your actual credit score, which is a three-digit number like 720. By law, you’re entitled to a free copy of your credit report once a year from each of the three major credit reporting agencies – Transunion, Equifax and Experian – but to get your actual credit score you have to pay, usually about $20.
If you do order your credit score, be sure which score you’re getting. The FICO score is the one most commonly used by lenders, but all three agencies also have alternative scoring systems they often use for scores given to consumers. These may approximate your FICO score, but not always, so it’s best to make sure it’s the FICO score you’re getting. Again, Experian does not provide FICO scores directly to consumers, so any score you purchase from that agency will be based on an alternative system.
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