If you're planning to apply for a mortgage, either to purchase a home or refinance your existing home loan, you're probably concerned about your credit score. While a good credit score is important, a lot of people worry about it needlessly. That's partly because they don't understand how credit scores work - and there's a lot of bad information out there about what does and does not affect your score.

Many potential first-time homebuyers probably have better credit than they realize. For many, the tendency is to regard good credit as some kind of high mountain to scale, at least when it comes to qualifying for a mortgage. The fact is, if you've got a couple of credit cards and a car loan you've had for a few years, and been fairly responsible in keeping up with your payments, your credit is probably ok.

For most people, their credit score will likely have more of an impact on the interest rate they end up paying rather than on their ability to qualify for a mortgage itself. That alone means a credit score is worth paying attention to and doing what you can to improve it. But before trying to do that, or apply for a mortgage itself, it helps to recognize a few misconceptions about credit scoring.

Your credit score determines whether or not you get a mortgage or other loan. Your credit score is important, yes, but it's only one factor in whether you qualify for a mortgage. Your down payment, employment status and income will be considered as well. As far a mortgage is concerned, your credit score is more likely to affect the interest rate you pay instead of whether or not you can actually get the mortgage itself - unless you have a history of missing payments. Which leads to the second misconception.

Your income and/or employment status affect your credit score. No, they don't. Your credit score is an assessment of how well you handle your debts, not how much debt you can take on. Even if you've lost your job and are drawing unemployment, it won't necessarily affect your credit score - unless you're unable to pay your bills. But that doesn't mean your income and employment status won't affect your ability to get a mortgage - they will. But lenders consider those along with your credit score - they're not wrapped up in the credit score itself.

Late payments will ruin your credit score. It depends on your definition of "late." For purposes of your credit score, a credit card, auto loan or other debt payment is not considered "late" unless it is 30 days past due. However, many people who've paid a few late charges for being a day or two late on credit card, mortgage or other debt payments assume it's hurt their credit - not so. On the other hand, being seriously late - 60 or 90 days on a payment - will do real damage to your score.

Reducing your number of credit cards will raise your score. Having a lot of unused credit cards could give some lenders pause, because you could potentially go out and rack them up with a lot of additional debt. But your credit score is more concerned with how much debt you have on the cards that you have. Ideally, you want to remain below 15 percent of your available credit. Eliminating unused cards will lower your available credit and increase your debt-to-credit ratio.

At the same time, with many credit card companies beginning to reintroduce annual fees on their credit cards, it may make good sense to pare back on them to avoid those charges. Just don't expect it to help your credit rating.

Your credit score is a particular number. Actually, you probably have at least three credit scores - one from each of the major credit reporting companies - Transunion, Equifax and Experion. Because they don't all receive the same information on which bills you pay and when, your scores will likely vary among the three.

You can get your credit score free of charge once a year. A lot of reporters conveniently overlook this fact when urging consumers to check their credit reports. Yes, you're entitled to obtain a free copy of your credit report once a year from each of the three major credit reporting firms and you should use this to check the accuracy of the information your score is based on - but the reports don't include your credit score itself. That you have to pay for, although it's only about $20 or so.

Shopping around for a mortgage or other loan will decrease your score. Although repeated credit inquires, which lenders perform when considering someone for a loan, will reduce your credit, the three credit reporting companies recognize that a large number of inquiries in a short period of time for one type of loan probably indicates someone is comparison shopping and not thinking about taking out multiple loans. However, other types of credit inquiries - such as applying for a credit card or auto loan in the months before you try to obtain a mortgage - will have a negative effect.

A late payment will damage your score for seven years. Although negative information - such as a credit card payment 30 days overdue - does remain on your credit report for seven years, it is rapidly eclipsed by more recent events in terms of importance. While a late payment may put a dent in your credit score, the impact will be gradually lessened if you stay current on your other debt payments and have a relatively insignificant effect by the time it finally drops off your report seven years later. But if you continue to add additional late payments to your report, that will have a major negative effect.

Paying your utilities on time will help your score. This is only half wrong. Paying your utility bills on time -- including gas, electricity, phone and cable - won't help your score. The utility companies simply don't bother with reporting this. However, missing your utility payments can have a major negative effect on your score, particularly if the debt is referred to a collection agency. So stay on top of these bills, but don't expect them to help you build credit if you don't have it already.

Again, keep in mind that your credit score is only one factor in your eligibility for a mortgage - the lender will likely want to consider things like your income, employment history and down payment in deciding whether to give you a loan. But your credit score will have a major impact on how much you pay for that loan, so it's well worth your while to do what you can to improve it.

Published on September 28, 2009