By Rae Oakley, Flyhomes Mortgage
When it comes to mortgages, credit is king. Yet somehow, there seems to be an endless number of myths out there surrounding what can and cannot hurt your credit score. Let’s debunk some of these myths once and for all.
Checking my credit will hurt my score
Quick vocab lesson: The official term for checking your score is an “inquiry.” Inquiries can only hurt your score when done with respect to a credit application. Because applying for a loan or a credit card means you’re probably about to increase your debt, doing so will result in a ding to your score. These instances are known as hard inquiries, and they can stay on your credit report for up to two years, but typically only affect your score for one.
Good news, though! There are also soft inquiries that allow you to check your credit without hurting your score. Technically, these are credit checks done irrespective of a credit application. Soft inquiries are essentially you in your pajamas on a Sunday night checking your score from your phone while half-watching TV. These do end up as inquiries listed on your credit report, but they are only visible to you, and, most importantly, they do not hurt your credit score.
Submitting multiple credit applications will hurt my credit every time
Not necessarily! If you’re shopping around for a loan, multiple hard inquiries within a given window of time are typically counted as one inquiry. This window can vary depending on the credit scoring model used, but it can be anywhere from 14 to 45 days.
This is advantageous because it allows anyone looking for a loan to shop with multiple lenders to find the best rate. Try to keep your search within the 14-45 day grace period, but don’t cut your shopping short for fear of hurting your credit. In many cases, finding a superior loan will outweigh the short term effects of that second hard inquiry.
Consumers don’t have access to their full credit report
Not true! In fact, you can receive one free copy of your credit report every 12 months from all three major credit bureaus (Equifax, Experian, and TransUnion). Credit reports, in addition to including your identifying information, include your tradelines (current and past credit accounts), inquiry history, and any bankruptcies or collections in your name. These are all useful points to know about your situation when it comes time to submit an application.
Closing a credit card will improve my score
Most credit applicants looking for a quick fix will often turn to any underused credit cards hanging out in the back of their wallet as a way to reduce their debt. However, closing a card might actually lower your score. This is because most credit scoring models look at how much credit you are using compared to how much you are alloted, also known as your “credit utilization ratio”.
When you close an account, you reduce your total available credit, so your credit utilization ratio goes up. So, if you are using more of your credit, this has the potential to send the wrong signal to credit bureaus, ultimately lowering your score.
Paying off debts removes them from your credit report
Don’t get me wrong, paying off debt is great, but it doesn’t make it like it never existed in the first place. In fact, evidence of your debts can remain on your credit report for years. This isn’t always a bad thing, though.
If you have responsibly paid your debts on time and in full, you’ll want to show this record of model behavior to creditors. If you have missed payments or even defaulted, however, that history does not work in your favor. Unfortunately some of this poor debt management can stay on your credit report for up to 7 years and bankruptcies, up to 10.
So there you have it. Five myths, debunked. Go forth, request your credit report, and leverage your newfound credit knowledge!