Myth Busting Credit Ratings

Dated: 03/19/2018

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Applying for a mortgage and having a good credit rating is pivotal for the buyer, as the lender will be evaluating the borrower strength and weaknesses to formulate a decision to approve or deny their application.

So ever wonder what your credit score really means or what factors truly weigh on that three-digit number?

Let’s clear up the misconceptions and do some myth busting on lending. While many North Carolinians seem to have a good grasp on how credit scores are calculated, others find it downright convoluted. Unfortunately, there is confusion on what is determined as Good and Bad from the borrower’s viewpoint.

To get some facts straight, Ethan Dornhelm, a senior principal scientist at FICO®, the company behind the Credit Score used over 90% of all lending decisions, has provided guidance and debunks the five most pervasive myths.

Myth #1: The More You Make the Better Your Score

We get a lot of people asking, 'Why is my FICO®, Score so low? I have a great income.’ There's an impression that somehow anything that makes you seem creditworthy will factor into your score, but income is not included in credit reports, so there is no effect on your score.

It is true that many times lenders will ask for your income when reviewing your loan application. This is more in line with validating a recurring income source than it is for determining if you have a high income. Your credit score doesn't factor in your salary. FICO®, Scores are based solely on listed items on your credit report such as credit history, new accounts and timeliness in payment schedules.

Myth #2: Maintaining a Balance Will Improve the Score

Many people think that credit debt is just a normal part of life. Thirty-seven percent of you believe that it's critical to maintain a balance on your card to increase your score. Well, that isn’t accurate. The fact of just having credit available will improve your score for both your credit history as well as credit utilization. The key is using credit in a responsible way, to increase your score, keep the balances low, pay off the monthly balance and increase the credit line without ever exceeding the limit. Lenders see this as active management skills of your line of credit.

In fact, FICO® says the debt-to-credit ratio for FICO® High Achievers is roughly 7%.

Myth #3: Closing an Account Erase’s the History

Thirty-five percent surveyed believe that closing a credit account will lower your score. When you close an account, it doesn't fall off your credit report. Plenty of closed accounts show up and will continue to show up for several years to come.

That's good news in a way. While closing an account diminishes your available credit, which could increase that debt-to-credit ratio, it doesn't erase the fact that you've had that credit line since, say, 2008 or it was your first card back in the old college days. The length of your credit history remains on your report for years even after closing the account. That's good since credit history length comprises about 10% of your score. The more history, the better your score.

Myth #4: Employers Can Check My Credit Score

You must bless our local media stations, they sometimes get this one wrong from time to time, adding to the confusion. Forty-three percent accept as the truth the misconception of checking their score will lower it. The fact is, you must provide permission to an employer before they can pull a credit report, let’s be clear here, that’s not a credit score. That credit report is considered a “SOFT" inquiry, versus one from a potential lender as a “HARD” inquiry. Those hard inquiries can affect your credit score if there are multiple hits that are signaling you're looking in a lot of places for a loan.

Myth #5: All FICO® Scores Are Created Equal

Then, there is why that you might receive a credit score of, say, 750 directly from FICO® while the lender states it’s a 746?

Well not all FICO® Scores are the same, there are several versions depending on your loan type. Most are consistent and similar, but you may notice subtle differences. For example, the FICO® Auto Score may look more closely at your auto loan repayment history. There are some slight nuances on how it’s calculated.

In addition, FICO® Scores are based on the records of a credit bureau, and different bureaus may have slightly different information about you, depending on what was reported to them by creditors and any changes or corrections you have requested.

And not all credit scores are even FICO® Scores. There are several educational credit scores available online for free, those are not used to make lending decisions, according to FICO®.

In closing, it's important to be vigilant over your credit-bureau records. You can request a free credit report each year from the three major credit bureaus through the site. It is recommended to schedule these during different times of the year, just to ensure there are no abnormal reporting or unauthorized accounts have been opened. Always consider the effect on your credit health when you open and close accounts, be strategic when deciding on how you will handle the timing and final payment prior to setting the actual closing. A great credit score is not dependent on how much you make but rather on what you do with your money. Being responsible for managing debt correctly will make that score soar to the top of the ratings.

About HTR Capital Group:

HTR is an independent company with local roots and national branches through its membership Referral Exchange, a network of over 20K licensed agents in all 50 states. HTR has strong working relationships with area builders, developers, businesses and city/county/state government officials. HTR believes Customers First is a Win-Win situation! No real estate transaction is too large or too small for the HTR team!  Ready to get started on buying or selling your home and need more information, click HTR Capital Group or contact Gregory Buscher, Realtor® at 919-795-9720 or email by clicking here [email protected].

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Gregory Buscher

Anyone who knows me will tell you I have never met a stranger. I enjoy getting to know people and helping them however I can. That’s what prompted me to change career paths and become a Licensed R....

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