Friday, September 21, 2007

Credit Myths

Your credit score has always been an important factor when financing a home. With the fall of the sub prime market it is that much more important as there are fewer lending institutions willing to take the risk of loaning money out to those with lower credit scores. Unfortunately, it seems that the majority does not understand how the credit score works. It seems to go against intuition. I thought I would clear a few things up.

Step one is to check your credit in advance. You can get a copy of your credit report once a year from each of the three credit reporting agencies. It would be a good idea to make this a yearly habit; it does not hurt your score to check your credit in this way and it is free. You may find something on there that you forgot about. There may also be something that doesn't belong there or wasn't reported correctly. These mistakes can take time to clear up; don't wait until the last minute. Make sure you check the report from all three agencies; one may have something the other two do not have.

Don't close any of your accounts! You can certainly pay down your debt, but even once they are paid off, do not close the accounts. You can cut the credit card up if you feel tempted to start using it, but closing the account; erases the credit history and reduces the amount of total credit you have available. The credit score looks at the difference between your available credit and what you are using.

If you have an excess of credit and you feel like you need to close something, make sure it is the newest account as you don't want to erase your credit history. Keep the accounts you have had the longest.

Shopping for a mortgage or a car loan will not hurt your credit. When you are going to make a large purchase, it is wise to shop around and get the best loan possible. Doing this will not hurt your credit score. The credit score will see multiple inquiries of the same type within a short period of time as one inquiry, and your score will only get dinged once.

My last piece of advice is to always seek professional advice before you do anything to try to improve your score. Call a mortgage broker; they would be happy to look at your credit report with you and lead you in the right direction.

If you are already pre-approved for a loan and in the process of buying, don't make any big purchases! Even though your lender has already checked your credit in order to approve you, they will check it once more right before closing. If there is a change the bank could pull out of the loan. I heard a story of an excited couple who went out and charged a house full of furniture for their new house before their escrow had closed. Needless to say, they were stuck with a lot of furniture and nowhere to put it!

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