There seems to be a lot of confusion about what does and doesn’t hurt your credit score out there being tossed around and much of it is by mortgage pro’s.
Let me begin by saying that I’ve worked with many top notch loan officers who really knew their stuff and kept up to date, not only on loan trends but on the information that’s available about credit scoring.
So if your loan officer or mortgage broker gives you any of the following advice, take a tip from me: Find a new broker.
Close you accounts to help boost your score.
No, don’t do this: Closing accounts never helps your credit score, and in fact may even hurt it more.
We have people all the time who say their mortgage lenders told them exactly the opposite. In one sense it’s true, having too many open accounts can hurt your score. Once you’ve opened the accounts, you have them, the damage if any is already done. It wont simply go away or fix itself by closing the account, and you could actually make things worse.
The credit score looks at the difference between your available credit and what you’re using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.
The score also tracks the length of your credit history. Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score.
Credit scores are not the only thing lenders look at. Typically they will consider other factors like income, assets, employment history and credit limit ratio’s. Mortgage lenders in particular might look at your total available credit and ask you to close a few accounts as a condition for getting a loan. They do this primarily to close access to using or spending additional monies.
If your main goal is to boost your credit score, generally you shouldn’t close accounts in advance unless there is a viable request to do so from your lender. Instead, pay down your credit card debt and bills, this is something that actually can improve your credit score.
Checking your FICO score will hurt your credit
Applying for new credit is generally what hurts your score. Ordering a copy of your own credit report or credit score doesn’t count. Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also aren’t going to hurt you, either — unless you actually take them up on their offers.
If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO score treats multiple inquiries in a 45-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.
For most people, one inquiry will generally knock no more than 5 points off a score (and scores typically run from 300 to 850, so that’s not a big percentage).
Credit counseling will hurt your score as much as a bankruptcy
The current FICO formula ignores any reference to credit counseling that may be in your file. That’s been true for the last three years, after researchers at Fair, Isaac, the company that created the FICO scoring system, noticed that people getting credit counseling didn’t default on their debts any more often than anyone else.
Your ability to get a loan could still be hurt by credit counseling, however. Your current lenders may report you as late, because you’re not paying what you originally owed or because your credit counselor isn’t sending your payments in on time. Late payments do hurt your credit score.
Lenders consider other factors besides credit scores in making their decisions, as well. The factors they look at can vary widely. Most want to know your income, for example. Some want to know how much savings you have or whether you’re a homeowner. Some will find credit counseling disturbing, while others see it as a good sign.
The mortgage lenders who don’t like credit counseling generally treat its enrollees the same as if they had filed for Chapter 13 bankruptcy. Chapter 13 is the kind of bankruptcy that requires a repayment plan and is looked at somewhat more favorably than Chapter 7, which allows you to erase many of your debts. You might still be able to qualify for a loan from one of these lenders, although your interest rates will almost certainly be higher than if you had perfect credit.
If you plan to get a mortgage soon, and you’re not already behind on your debts, it’s probably smart to steer clear of credit counseling. If you’re already in trouble, however, a good credit counseling agency might be able to help you get back on track.
FICO isn’t the only score you need to check
All three of the bureaus offer FICO credit scores using the formula developed by Fair, Isaac, but they each give the scores a different name. At Equifax, the FICO is known as the Beacon credit score. At TransUnion, it’s called Empirica. At Experian, it goes by the unwieldy title of “Experian/Fair, Isaac Risk Model.”
Complicating matters further is that you’ll probably have three different scores from the three different bureaus, largely because the bureaus don’t all share the same data. One bureau may list more accounts for you than another, for example, and the differences (in types of accounts, payment histories, credit limits and balances) will be reflected in the score that bureau computes for you.
Because of those differences, it does make sense to pull and examine your credit reports from all three bureaus before you apply for a big loan like a mortgage. Many mortgage lenders take the middle score from the three bureaus when making their decisions, so fixing errors in all three reports before you shop for a loan is smart.
You can get all three of your FICO scores from myFico.com.
The best ways you improve your credit score are the same in any case: Correct any errors such as things on your score that are not your’s, pay your bills on time, pay down your debt and apply for credit sparingly, don’t just sign up for everything.
Need an agent or have a question, give The Derrick Monroe Group of Realtor’s a call at 612-282-7653.
Information pulled from multiple data sources and articles.
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