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5 Credit Score Myths

In my last blog, I explained why your credit score is so important. After receiving quite a few questions on the subject from readers, this week’s entry is on clearing up some of the most common credit score myths.

Myth #1:  “I know I have great credit because I pay my bills on time and I don’t have any debt.”

Wrong:  1st, there is nothing wrong with debt. In fact, having debt can actually raise your credit rating. This may sound strange to some and sound to others. By having debt, you are exercising your credit. The more you exercise your credit, the better it gets. This is, of course, contingent on the amount of debt you have. A “healthy” amount of debt is roughly 25% of your your limit. If you have a $10,000 credit limit, try not to have more than $2,500 in debt at one time.

If you don’t have a credit card, work to get one as it is one of the quickest ways to establish credit. Remember, an unestablished credit score is not necessarily better than a low credit score.

Myth #2:  “I can’t buy a home for 7 years because I walked away from my last mortgage.”

Wrong: While it is true that walking away from a mortgage through foreclosure or from a short sale will stay on your credit report for 7 years, that does not mean that you will not be able to buy a house during that time. There are many other factors that make up a credit score and if your credit has taken a hit, you should focus on repairing your credit soon after so that you do not have to wait seven years. There are many different types of loans out there and some can even get you home even with a 7-year hit. This will of course depend on the circumstances involved in the loss of the last home as well as how much cash you are able to bring to the table as a down payment for your next home.

Myth #3:  “I don’t need a great score if I have a well paying job and a decent savings account.”

Wrong:  Hey, I think it is wonderful that you have a great paying job (especially in this economy) as well as a healthy level of savings put aside. Unfortunately, your lender will not be as thrilled. Lenders have company guidelines that they must adhere to. Now, if this was 6 or 7 years ago, getting a loan with a lower credit score would not be a problem.  But times have changed and these restrictions on lending guidelines have gotten much stricter.

A lender bases your future ability to pay off a mortgage on your past ability to pay, not your current accessibility to money. One good thing that a healthy amount of savings can do is to help you raise your credit score if you lower the amounts you owe on credit cards to less than 25% of your limit as well as continue to pay your bills on time. If your savings is substantial, skip the lender and purchase a home with cash. Don’t think you can afford it? You would be surprised by how low home prices have gone, especially on foreclosures and short sales.

Myth #4:  “I have a better credit score from my short sale than someone who was foreclosed.”

Wrong: Short sales and foreclosures have the same impact on your credit score. The only difference there could be between the two concerning a credit score would be the number of missed payments before the foreclosure or short sale.

Myth #5: “Getting a loan will not be a problem. I checked my score a while back and it is pretty good.”

Wrong:  Lenders are not going to use the same source where you received your credit score from. Mortgage companies have their own proprietary equations to come up with your credit score and these could vary widely from the one you received. The key is to avoid surprises. If you are interested in purchasing a home and you know you are going to need loan, you should talk to a lender before anything else. This way, you will have plenty of time to work out any issue you may have.

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