Credit Score Myths Debunked: Unpacking Truths for Homeownership Success
When the aspiration to become a homeowner takes center stage, a strong credit score becomes a critical player, underpinning your likelihood of securing a mortgage by showcasing your commitment to punctual repayments. A less than stellar credit score can, unfortunately, act as an imposing barricade on your path to homeownership. This underlines the crucial importance of comprehending and managing your credit score.
This March, as we observe National Credit Education Month, it's an opportune time to unpack the intricacies of credit scores. It's quite startling how many harmful myths and misconceptions have taken root, causing missteps for many potential borrowers.
Let's bust some of these stubborn myths and shed light on the actual facts about credit scores. After all, you don't want to discover that your credit score has been stagnating due to false information, especially when you've been envisioning owning your own slice of the American dream.
Myth #1: Regularly checking your credit score will damage or reduce it.
Reality Check: It's the “hard” inquiries or stringent checks that might shave off a few points from your score, not personal checks which fall into the “soft” category.
When you grant permission to a lender or an organization to inspect your credit, particularly when applying for a mortgage or credit card, this "hard" inquiry could exert a transient negative impact on your credit score.
In contrast, "soft" inquiries, such as when you take the initiative to review your credit score and report from the three main credit bureaus (Equifax, Experian, TransUnion), bear no effect on your score. Regular monitoring of your credit score can be invaluable in keeping tabs on your progress in credit building and nipping any issues in the bud.
Today, various websites like creditkarma.com or annualcreditreport.com and most card issuers let you access your credit score easily. In light of the COVID-19 pandemic, the three credit bureaus have extended free weekly online reports until April 2021.
Myth #2: Closing an aged credit card will enhance your credit history.
Reality Check: In most cases, terminating a credit card can harm your credit score more than enhancing it, especially if the card carries a balance.
A chunk of your score is derived from your credit history's length. Hence, if you close a long-standing card, it could negatively affect your score. Maintaining a credit card responsibly over a longer duration positively influences your credit score. Therefore, keep those accounts active, especially if they’re in good standing and come sans annual fees.
Myth #3: Maintaining a balance on your credit card bolsters your credit score.
Reality Check: Keeping a running balance on your credit card merely inflates the interest you owe, not your credit score. In fact, it has the potential to decrease your score and ultimately results in squandering money as you rack up interest over time.
Remaining balances on your account impact your credit card utilization rate directly. Higher credit card balances correspond to higher utilization rates, which can, conversely, damage your credit score.
Myth #4: Marriage will unify your credit scores.
Reality Check: Regardless of marital status, you and your partner maintain individual identities, credit scores, and credit histories. Therefore, marrying a partner with good credit won't magically elevate your score, nor will a partner with poor credit adversely affect you.
However, when you apply for a joint mortgage, lenders scrutinize both your credit scores. Consequently, if one partner's score is less than satisfactory, it could pose a problem.
Myth #5: A good income directly correlates to a good credit score.
Reality Check: Your income bears no direct impact on your credit score. It isn’t factored into credit reports and hence can't influence your score.
FICO scores are shaped by five diverse factors, including payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). While a commendable job with a handsome salary can bolster your finances, your credit score hinges on past credit management. Therefore, a lucrative income won’t rectify poor credit management.
When applying for a mortgage, lenders evaluate your income and credit score as separate elements before greenlighting your loan.
Regardless of your financial status or income, the best approach to enhancing your credit score is consistently making on-time payments on any outstanding accounts.