What You Really Need to Know About Improving Your Score
Do you know your credit score? That three-digit number represents the risk lenders take when you borrow money and determines the spending limit creditors put on your credit card, if you qualify for a mortgage, what interest rate you get on loans for homes, cars and other purchases and can even play a role in whether or not you get that new job you’ve applied for.
Your credit score is a calculation based on information found on your credit report. Keeping track of and working to improve your credit score is essential, especially if you’re considering making a major purchase — like buying a new home — in the near future. But what factors actually affect your credit score and how can you improve your credit? Let’s clear up a few common myths about how credit works and how to improve your credit score.
Myth #1: Checking your own credit hurts your score.
Fact: Requesting copies of your credit report from sites like AnnualCreditReport.com or Credit Karma is considered a soft inquiry, which will not affect your credit score. When you apply for a credit card, bank loan, mortgage, auto loan or another type of credit, that is a hard inquiry, and will affect your credit score. Regularly checking your credit score helps you stay on top of that number and watch for errors and inaccuracies on your report.
Myth #2: You only have one credit score.
Fact: You have multiple credit scores, and the one you see in your credit report may not be the same score your lender sees. Credit scores vary depending on the type of inquiry made. For example, a credit score for a credit card is often different than that for an auto lender or mortgage lender. Your score also depends on what credit bureau data is being pulled (Experian, Equifax or TransUnion) and the model used (FICO, VantageScore, etc.) That said, your credit scores — while maybe not identical — should be similar.
Myth #3: Closing credit cards hurts your score.
Fact: This is only partially true. Closing an old credit card account doesn’t erase that card’s history from your credit report, thereby shortening your overall credit age (the longer your credit history, the better your score), but credit bureaus will remove closed accounts from your report after ten years. Here’s how closing a credit card could affect your credit score: credit utilization rate. Most experts recommend keeping this number below 30 percent. To determine your utilization rate, divide your total credit card balances but your total credit card limits. If you close a card with a high limit, you may see your credit utilization spike, which would then in turn drop your credit score a few points. You’d be better off to keep credit cards open, use them occasionally and pay them off immediately.
Myth #4: Making more money will raise your credit score.
Fact: Your income is not found on your credit report, so don’t assume that making more money will help improve your credit score. That score is dependent on factors like your credit history, credit usage, on-time payment record, public records, inquiries and new accounts and is not impacted by the amount of money you bring in.
Myth #5: Carrying a balance on your credit card will increase your score.
Fact: No need to maintain a balance on your card from month to month to show credit utilization and increase your score. Carrying a balance from one month to the next will only cost you in interest payments. Instead, aim to use your card on a regular basis and pay it off each month so you’ll get the benefit of utilizing credit without paying interest.
Myth #6: Paying debts clears up bad credit history.
Fact: Payment history makes up 35 percent of your credit score, so paying down debts — and paying on time — is always a good idea. If you have a history of missed or late payments in your payment history, unfortunately, paying off that particular debt won’t erase those delinquent payments from your credit history. Late payments over 30 days remain on your credit report for seven years, so be sure you’re making at least the minimum payment in plenty of time for that payment to post before its due date.
If you are considering applying for a mortgage loan soon, now is the time to start working on improving your credit score. Here are a few tips to help:
•Know your credit score and keep an eye on your report for any errors or inaccuracies. If you notice an error, contact the credit bureau immediately to dispute it and get it cleared off your credit report. You can request one free report from each credit bureau each year from AnnualCreditReport.com.
•Pay your bills on time. Set up auto pay for recurring bills so you never miss a payment and keep an eye on your bank accounts to ensure you have enough money in the account to pay those bills.
•Keep credit card balances low (remember the 30 percent rule). Mortgage lenders will look at how responsible you are with credit, so live within your means and don’t overextend yourself financially. Create a budget so you know just how much you can afford to spend each month after you’ve made monthly payments.
Are you ready to take the next step toward purchasing a new home? Getting prequalified* can help you know how much home you can afford and may identify any credit problems that need to be resolved before you apply for a mortgage loan. Contact PrimeLending today to speak with a home loan expert who can help you get prequalified for a mortgage.
*A prequalification is not an approval of credit, and does not signify that underwriting requirements have been met.