Wrong information can be just as damaging as no information, and there’s a whole host of it surrounding the lending industry. Much of it involves credit scores.
Sadly, because many Mortgage lenders and bank representatives never take the time to actually learn about credit scoring, much of the bad information comes directly from sources you should be able to trust.
For instance, some will tell you that you should close open accounts. No! You should not. You definitely shouldn’t open any new accounts or even apply for new accounts when you’re trying to build your credit score, but if you close accounts you now have, you could actually lower your score.
This is because your debt load is measured against the credit you have available to you. When you close an account, that credit is not available, so your debt ratio goes up, making your account balances seem higher.
For instance, if you have 4 credit cards, each with a limit of $5,000, and you have balances of $3,000 and $4,500 on 2 of the cards, and zero balance on the other two, you are using only $7,500 of $20,000 available, or 37.5%. If you close the two unused accounts, you’re now using $7,500 of $10,000 – or 75% of your available credit.
The truth: If you can pay down your debt, definitely do it. But once the accounts are paid, leave them open.
You’ve also heard that inquiries on your credit lower your score. This is true if the inquiries come from specific retailers, but not if you check your own score. Mass pre-approval inquiries are also ignored when your credit is calculated. Retailer inquiries lower your score by only about 5 points, so don’t be careless, but don’t panic if there’s been an inquiry.
A good rule of thumb when you’re working on getting a Mortgage loan is to not shop for cars, furniture, appliances, etc. until your loan closes. The credit inquiries could damage your score just enough to hurt you – and even paying cash isn’t a good idea. Keep your bank balances as high as possible until there’s no chance that the lender will make a last minute check.
Next is the use of credit counseling. At one time this did affect your score, but a study conducted 3 years ago showed that people using credit counseling did not default on their debts any more than other people. The most current FICO formula ignores credit counseling all together.
BUT – credit counseling can still be risky. Sometimes counseling agencies make payments late or pay lesser amounts – and these mistakes will affect your score.
