The Truth About Your Credit Score

 

There are many assumptions about what affects your credit score, negatively and positively. Some of what you think may or may not be true. Fortunately, it is easy to debunk these myths. If you are thinking about a mortgage refinance, opening a line of credit on your home equity or simply worried about your credit score, you need to be aware of the aspects that make up and affect a credit score. 

Many homeowners believe that changing jobs affects their credit score. This is true only to a certain degree. Merely changing jobs does not impact your credit score, but a string of job changes may be held against you. Also, a dip in income may indicate to potential lenders that you have trouble making consistent on-time payments.

 It is also true that finding a greater source of income, be it a new job or opportunity, will not affect your credit score.  However, potential lenders will still investigate your level and source of income when making final loan decisions, even if it is not on your credit score.

Contrary to popular belief, consolidating credit lines does not necessarily help your credit score. Many lenders evaluate a debt-to-available-credit ratio, and moving all of your balances to one card negatively affects that ratio. Still, if one card offers a lower interest rate and makes it easier for you to pay off your debt, it may prove useful. A large balance on one card is not a deal breaker for most lenders¾just another evaluation factor.

Another falsehood of credit scores is that owning multiple credit cards hurts your credit score. This again involves the aforementioned debt-to-available-credit ratio. Abusing these credit cards, however, will impact your credit score. It is best to keep balances well below their maximum value; leave 80% – 90% of your balance open.  

Opening and closing lines of credit has a negative effect on your credit score. New applications lower your credit score. Also, closing lines of credit affects your debt-to-available-credit ratio, again making an impact on your credit score. If you are considering refinancing or applying for a large line of credit, it is best to wait before applying for new cards and avoid altering your available credit.

If possible, stay away from being a co-signer. It opens your credit score up to a world of harm if the fellow signer is late on their payments. Worst of all, you may not even know that the fellow signer missed their payment until it is too late. Conversely, on-time payments made on the loan do not positively affect your credit score.  

Judgments and liens will show up on your credit score. Thirty – five percent of your credit score is based upon payment history, and this is where judgments and liens will appear. In terms of utility accounts, on-time payments are not factored in, but past due accounts and those that have been referred to a collection agency will negatively impact your credit score.

 Ask your local REALTOR and lending office about your credit score and how it will affect your chance for a loan during the home buying or refinancing process.

 

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