Most homebuyers are aware that their credit score is important to their ability to obtain a home loan, but a surprising number of buyers are not sure what is fact and what is fiction when it comes to their credit score. Below, we attempt to dispel some of the more common myths surrounding credit scores.
Misconception 1: Closing My Credit Card Account Will Erase Its History
While it would be great to make that late payment just disappear from your credit report, closing your credit card account won’t do that. You closed account can still appear on your credit report for years after you closed it. You could actually hurt your credit score by closing the account because it reduces your availability, therefore increasing your debt-to-income ratio. Additionally, it is better for your score to keep long-running accounts open since they provide lenders with a more thorough look at your credit history.
Misconception 2: Earning a higher income equals a better score
Many homebuyers feel that if they make a good living, they will have no problem obtaining a mortgage. The truth is your income has no bearing on your credit score. Zero. While a buyer will need an income source to qualify for a home loan, and having a higher income will help you to qualify for a larger loan, salary is not factored into your credit score. FICO Credit Scores are based only on information included on your credit report, such as your credit history and debt-to-income ratio.
Misconception 3: Carrying Debt on Your Credit Card Will Help Your Score
About that debt-to-income ratio – your total credit-card debt divided by the total of your credit limits – some homebuyers think that they will have a better credit score if they are carrying a balance on their credit card. Some buyers think that by carrying a larger balance than necessary demonstrates their ability to use and manage credit. In actuality, you should pay off as much of your debt as possible. Measures of your debt burden make up roughly 30% of your FICO Score, according to Chase.com, so having a lower debt-to-income ratio is better for your score.
Misconception 4: All Credit Scores Are Created Equal
Credit scores will vary a little depending on the reporting agency and the type of loan you are seeking. For example, you may notice a slight difference in your credit score when applying for a home loan versus an auto loan. Different credit bureaus may have slightly different information about you, which will allow your score to fluctuate some. It is also important to note that credit score you obtain online for yourself is not exactly the same as the credit score a potential lender will see, as they are often calculated using a formula from the hosting site, not FICO.
Misconception 5: Employers Can Check Your Credit Score
Employers may only pull your credit report with your permission, but they are not allowed to pull your credit score. A credit report review by an employer is considered a “soft” inquiry, not a “hard” inquiry from a potential lender. Hard inquiries may or may not affect your credit score, but a soft inquiry will not affect your credit score. So don’t worry if your employer pulls your report. It will have no effect on your ability to obtain a loan.
Since credit score is so important for obtaining a mortgage, it would be a good idea for homebuyers to monitor their own credit reports. You can get a free credit report every year from each of the three major credit bureaus on AnnualCreditReport.com.
If you or someone you know is considering buying a home in the Wilmington, NC area, find out how you can save money, time and headaches by talking with an exclusive buyers agent at Just For Buyers Realty. 910-202-4813. Info@JustForBuyersRealty.com.