here are some great pointers for anyone trying to understand a little more about their credit in case they are want to get into the market and buy a home for sale on the Central Coast.
Recently I listened to an interview with a loan officer from New York who has spent most of his career researching and analyzing countless credit reports and credit scoring information in an attempt to understand how credit scores are calculated and the nuances surrounding this oftentimes baffling formula. The following are some of the credit scoring myths that were discussed. You will be surprised by some of them and hopefully they will provide you with the means to help improve your score!
Myth: there is a specific number "score" that is attached to my credit file.
Fact: your credit score is not stagnant. It is created the moment your score is pulled. It may vary from month to month.
Myth: pulling my own credit report might hurt my score.
Fact: pulling your own credit does not affect your score if done on various sites such as www.annualcreditreport.com or www.myfico.com. This is what is called a "soft inquiry." It's never a bad idea to pull and examine your own report and look for inaccuracies. Your score may only be affected if your credit is pulled by a mortgage company, auto dealer, department store, etc. This is called a "hard inquiry" and you want to keep these to a minimum. However, be aware that there is what's called a "14 Day Rule" with the credit bureaus which means that you can shop around for a mortgage or car and have as many of those types of creditors pull your credit within a 14 day period and it will only count as 1 hard inquiry, not 10 or 12 which is good news! My advice however, is to do all this within a 13 day period just to be on the safe side...
Myth: closing out my paid off credit cards will help my credit score
Fact: closing credit card accounts is never a good option if you're trying to raise your credit score. Although it sounds counter-intuitive, it is always better to have more unused, available credit especially if you're carrying a balance on your other cards. Part of your score is based upon your ratio of credit used to credit available. The more you have available, the better. It's just that simple.
Myth: once I pay off a collection, it will no longer show up on my credit report
Fact: anything on your credit report stays on there for a minimum of seven years. The only thing that will change if you pay off a collection is the balance to zero and the status to "paid" or "settled."
Myth: paying off old collection accounts will help my credit score.
Fact: morally this sounds like the right thing to do. But the truth is if you have open collection accounts that are over two years old it is best to leave them alone. The reason for this is because the collection's "last active" date on the credit report affects the score by how recent the account was active. The more recently active collections will have a greater negative impact on your score. If you pay off a collection that has been dormant for 3 years, you've now "brought it back to life." And even though it is now paid, you've actually hurt your score by making an old collection new again. If your lender requires they be paid off as a condition of the loan approval, then you may do it through closing but not any sooner. Now, if you've negotiated with the collection agency to delete the account upon full payment, then by all means, pay it off. Deletion of the account will more than likely increase your score. Alternatively, if the collection account is less than two years old and you can't negotiate a PFD, then paying it off may help your score.
Myth: if I co-sign on a credit account for a friend or family member, their payment history will not show up on my credit and/or affect my score.
Fact: in a perfect world, you would have been thoroughly informed befor you co-signed for anyone. The fact is, if you co-sign for any credit account, you are just as responsible for timely payment on that debt as the main signor/borrower. That credit account will most certainly show up on your credit and if the main signor has not been making timely payments, this will undoubtedly lower your score. Please be careful and consider the consequences when co-signing on a loan!
Myth: I make way more than the minimum monthly payment on all my credit cards so my score should be higher than someone who only makes the minimum monthly payments.
Fact: there are only two types of ratings the credit companies send the credit bureaus: "paid as agreed" or "not paid as agreed" (and of course if "not paid as agreed" they would tell the bureaus how many times you've been 30,60,90 or 120+ days late). If you've "paid as agreed" they do not care by how much - only that you've paid what you agreed to pay which is the minimum monthly payment. Whether you make the minimum monthly payment or $500 more per month it makes no difference in your credit rating. Of course, paying "as agreed" is the best you can do so by all means keep doing it. If you are really interested in improving your score, be diligent in paying down your various balances as much as you can and don't charge them back up every month. As stated above, the greater your available credit, the better your score.
Myth: late payments is the biggest drain on my credit score
Fact: sure late payments really do hurt your score, especially if they're within the last 12 months. However, how much credit card balance you carry in relation to your credit limits is also a huge factor. In fact, the worst thing you can do to your score is max out all you credit cards. As stated above, the best thing you can do to help your credit score is make a plan to pay down your card balances starting with the cards with the balances that are at their credit limit.
Myth: never file for bankruptcy. It's the single worst thing you can do to your credit rating.
Fact: this is a touchy subject and I would never overtly advise someone to file for bankruptcy. It is always best to talk to a qualified attorney if you are in such dire straits. But the reality of it is, if you are even considering filing bankruptcy chances are your credit is pretty wrecked anyway and you have no prospects of improving it. Filing bankruptcy may be the only way for you to climb out of the situation and work on educating yourself in rebuilding your credit and forming a good solid financial plan for your future to ensure it does not happen again.
I hope these examples arm you with more information you can use when considering buying a home. The more you know about your credit and how your credit scores are affected, the more you can help yourself and your lender optimize those scores and thereby open up more varied and attractive financing options to you. If you have any questions, please do not hesitate to call me. I've helped many people with their credit and I can help you too.
This content was created by Cari Anderson and originally posted on our "Mortgage Notes" blog.
~Cari & Doug Anderson with Diversified Mortgage Group
Cari CA DRE #01220718
Doug CA DRE #01165309
