When it comes to buying a home, your credit score plays a crucial role in determining your eligibility for a mortgage and the interest rates you’ll be offered. However, there are many myths and misconceptions surrounding credit scores that can leave potential homebuyers confused and misinformed. In this article, we will debunk common credit score myths and provide you with the facts you need to make informed decisions when purchasing your dream home.
Myth 1: A Perfect Credit Score is Required
Fact: While a perfect credit score of 850 is indeed desirable, it is not necessary to secure a mortgage. Lenders consider a range of credit scores when approving loans. Typically, a score of 620 or higher is considered fair to good credit, making you eligible for various mortgage options. However, the higher your credit score, the better the terms you are likely to receive.
Myth 2: Checking Your Credit Score Hurts Your Score
Fact: Contrary to popular belief, checking your own credit score does not have a negative impact on it. When you check your own credit, it’s considered a soft inquiry, which does not affect your score. It’s essential to monitor your credit regularly to ensure accuracy and address any potential issues.
Myth 3: Closing Old Accounts Improves Your Credit Score
Fact: Closing old credit accounts can actually harm your credit score. Part of your credit score calculation considers the length of your credit history. Older accounts with a positive payment history can positively influence your score. Closing them reduces your credit history’s average age, potentially lowering your score.
Myth 4: Paying Off Debt Erases Negative History
Fact: Paying off debt is essential, but it doesn’t instantly erase negative payment history or late payments. Negative information typically remains on your credit report for seven years. However, as time passes and you maintain a positive payment history, the impact of those negative marks lessens.
Myth 5: All Credit Scores Are the Same
Fact: There are different credit scoring models used by various credit bureaus and lenders. The most common credit score model is the FICO score, but there are others, such as VantageScore. Each model may use a slightly different calculation method, which can result in variations in your score. It’s essential to understand which score your lender uses and review your credit report from that specific bureau for accuracy.
Myth 6: Paying with Cash Builds Credit
Fact: Paying for expenses with cash or a debit card does not impact your credit score. Credit scores are based on your credit history, which includes credit cards, loans, and other credit accounts. To build or improve your credit, you need to responsibly manage credit accounts and make timely payments.
Myth 7: Co-Signing Doesn’t Affect My Credit
Fact: Co-signing a loan can have a significant impact on your credit. If the primary borrower misses payments or defaults on the loan, it can negatively affect both the primary borrower’s and the co-signer’s credit scores. Be cautious when co-signing, and only do so when you trust the borrower’s ability to repay the loan.
Myth 8: Paying Off Collections Removes Them from Your Report
Fact: Paying off collections can be a responsible step, but it doesn’t automatically remove them from your credit report. Paid collections will still appear on your report for seven years. However, some lenders may view paid collections more favorably than unpaid ones when considering your creditworthiness.
Understanding the truths and dispelling the myths about credit scores is essential for homebuyers. Your credit score is a powerful financial tool that can impact your ability to secure a mortgage with favorable terms. By maintaining good financial habits, monitoring your credit, and being aware of the facts, you can take control of your credit score and increase your chances of becoming a successful homebuyer.