Credit Myths: BUSTED. What You Need To Know About Credit

One of the most important aspects of applying for a
mortgage is credit, for both the borrower to assess
and the lender to evaluate. A borrower’s credit history
and score can be a pivotal factor in a lender’s
decision to approve or deny a mortgage. Knowing
how credit is determined, and how to improve it if
needed, is crucial to ensuring a successful outcome.

While most Americans seem to have a handle on the
basics of how credit scores are calculated, others
are downright confusing. Essentially, the way that
creditors look at a borrower’s profile depends on a
variety of different factors. Unfortunately, there is a
lot of confusion on what is considered good and bad
from a borrower’s standpoint. For example, while a
missed payment is a sure sign that you might not pay
back your loan on time, other subtle factors like diversity
in your credit profile can give insight to lenders
into your credit history.

Below are six common credit myths, recently revealed
in a survey by TransUnion, one of the three
major credit reporting agencies.

1. My score will go down if I check it.

Forty-three percent of those surveyed believe the
misconception that checking their credit score will
lower it. A “hard inquiry,” or one that comes from a
lender, could—but a “soft inquiry,” or one made by a
borrower, will not, according to the agency.

2. My score will go down if I close an account.

Thirty-five percent of those surveyed believe closing
a credit card account will lower their credit
score. Closing an account can lower a score, especially
if it is longstanding, according to the agency—
but if the card history is short or the limit is low,
closing it could be harmless to a score. It is important
to note, however, that cards close to bumping
up against their limits can do damage to your credit
score. Even though your score can take an initial
hit by closing an account that’s close to the limit, it
will improve if it helps you to better manage other
existing accounts.

3. My utility bills impact my score.

Fifty-one percent of those surveyed believe utility
payments are factored into their credit score—a
partial truth, according to the agency. Some utility
companies share all payment information with credit
reporting agencies, while others share only late
payment information.

4. My large balance is fine if I pay it on time.

Paying all of your credit card bills on time is absolutely
critical since payment history holds the most
weight among most credit scoring models. However,
51 percent of consumers believe that carrying a high
balance is good for credit health. Unfortunately, this
isn’t true. High balances paint a picture that says
you don’t know how to utilize your credit rate. How
much debt you are carrying versus your collective
credit and balances on individual cards is the second
most important factor for calculating credit score.
It’s best to keep your balances below 30 percent of
your available limit. Even better, pay off all of your
purchases in full by the end of the month.

5. My score will only improve if I have a balance.

Most people believe that credit card debt is just a
normal part of life. Thirty-seven percent of consumers
believe that it’s crucial to maintain a balance on
your card in order to improve your score. This isn’t
true. The act of simply having a credit card will benefit
both your credit history and your credit utilization
rate, especially if you keep your balance low. With
that being said, using your card in a responsible way
will do the most for improving your credit score into
the future.

6. My short history of credit can’t hurt me.

Holding off on opening credit accounts will probably
end up hurting you in the long run. Fifteen percent of
your FICO score is based on the length of your credit
history, or essentially the amount of time you’ve
been taking out loans. Not opening lines of credit
signifies that you’re uncomfortable with the process,
and aren’t responsible enough to be able to manage
it to your advantage. If you want to start small to ensure
that you can successfully manage credit, ask a
parent or guardian to add you as an authorized user
to their existing credit card account.