The Truth About 10 Credit Score Myths
Below is a MRR and PLR article in category Finance -> subcategory Credit.
The Truth About 10 Common Credit Score Myths
Summary
Credit scores significantly impact both borrowers and lenders. Just as excelling in sports or academics brings benefits, maintaining a strong credit score offers real advantages. Here, we debunk 10 common myths about credit scores.
Importance of Credit Scores
A good credit score allows you to borrow more while paying less in interest. For instance, on a $300,000 mortgage, a borrower with excellent credit might secure the best rate, while someone with poor credit might pay 1.5% more, costing about $4,500 extra annually.
1. Improving Credit After College
If you're fresh out of college and looking to buy a house, focus on paying every bill in full and on time. Negative items linger on your credit report for seven years (ten for bankruptcies), but recent credit behavior is most crucial for lenders.
2. Income and Credit Scores
Your income doesn't affect your credit score. Credit reports don't reveal your earning, which is why loan applications ask for income details separately. A person earning $45,000 annually can maintain a better credit rating than someone making $200,000 if they meet repayment obligations.
3. Employer ID vs. Social Security Number
Using an employer ID instead of a social security number for credit is illegal and constitutes "credit substitution." It won't work, as lenders only accept social security numbers. If advised otherwise, seek help elsewhere.
4. Should You Borrow More with a Strong Payment History?
Even with a strong payment history, borrow only what you need. Credit scores consider how much you owe compared to your available credit. Maxing out credit cards negatively affects your score.
5. Number of Credit Cards
Reducing the number of credit cards by combining accounts can lower your score. Two factors matter:
- Credit Limits: Using a higher percentage of your available credit adversely impacts your score. Keep balances low and pay off cards promptly.
- Credit History: A longer credit history boosts your score. Keep older accounts open, even if unused.
6. Impact of Unpaid Bills
Unpaid bills, not just credit cards, appear on credit reports and affect your score. Many credit cards have "universal default" clauses, allowing issuers to raise rates if you miss payments.
7. Timing of Mortgage Payments
Payments are typically reported as late only if they're over 30 days past due. However, some lenders might impose fees or raise rates for payments even slightly late. It's best to pay on or before the due date.
8. Checking Your Credit
To combat identity theft, regularly check your credit reports. Access free reports annually from each major agency via AnnualCreditReport.com. Additional free reports are available under certain conditions, like denial of credit.
9. Late Payments
If you anticipate a late payment, many institutions offer options for quick payments, like online or phone payments. Know these options in advance. If a payment will be over 30 days late, contact your lender immediately to work out a solution.
10. Mortgages After Foreclosure or Bankruptcy
While foreclosures and bankruptcies complicate mortgage access, they don't always stem from personal mismanagement. Health crises, job loss, or natural disasters are valid reasons. Before house hunting, consult lenders about potential options if you’ve faced these challenges.
Understanding these myths and truths can guide better financial decisions and improve your credit management. If in doubt, always reach out to a professional for advice.
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