Many people do not comprehend what makes up their credit score. Yes, paying your bills on time keeps it in good shape, but there is much more involved. Some of the myths about credit scores are easily debunked.
To start, owning several credit cards does not necessarily hurt your credit score. Creditors and potential lenders, when evaluating your credit score, review your debt-to-available-credit ratio. More cards equal a higher debt-to-available-credit ratio. However, several maxed-out cards can pose problems when you’re applying for a loan or line of credit.
It’s important to stay consistent with your available credit. Opening and closing lines of credit can hurt your credit score. Closing lines of credit decreases your debt-to-available-credit ratio. Try to avoid making changes to your available credit before refinancing or apply for a second mortgage.
If you think you have too many credit lines but do not want to close them, might be tempted to consider consolidation. But think again. Consolidation will not directly improve your credit score. Consolidation actually Negatively affects your debt-to-available-credit ratio, which again, lowers your credit score. Still, this is typically not a deal breaker for potential lenders.
Another common belief is that more money, from a new job or promotion, equals a higher credit score. This is not the case. Even though a potential lender may consider your levels and sources of income when making a loan decision, it is not a factor in your credit score.
Many believe a higher-paying job increases their credit score. Not exactly true. While it may be a factor in a potential lender’s decision, it is not directly accounted for on your credit score. Frequently changing jobs can hurt your credit score. If it appears to a lender that you are a chronic job hopper, the lender will take that into account when making the final loan decision. Also, a new job with a lower income will signify to lenders that you may run into trouble making payments on time.
While you may be inclined to help others, be it family members or friends, understand that co-signing on other loans can hurt your credit score. Even if they make all of their payments on time, it does nothing for your credit score. But, if they were to miss or be late on a payment, it would negatively affect your score.
Utility accounts are similar to co-signings; they do not count for the good, only the bad. If your utility account is overdue and reported to a collection agency, it will show up on your credit score. On-time payments are not reported but rather expected.
Judgments and liens, though they are not directly a part of your credit score, do have an effect. They are an aspect of your payment history, which accounts for 35% of your overall credit score.
For all of the information on what makes up your credit score and how to improve it, contact your lender or local REALTOR.