Frederick County Short Sale Blog | Homes for Sale in Frederick Md

Credit Score Myths

If you are trying to improve your credit score, or even keep it in good standing, don't fall pray to some common myths that are batted about:

1st Myth:   Closing an old account that you don’t use anymore will boost your score.

While its true that having too many accounts can hurt your credit score, that alone is not so much of a problem.  The problems arise when you open too many credit accounts at once, or have all of your accounts maxed out.  Your debt-to-credit ratio is 30% of your FICO score, so if you cancel any accounts, that raises your ratio, which is not what you want to do.

The other aspect of your credit score, credit history…35% of your score is damaged as well when you cancel old accounts.  You want to keep the older accounts, they give you a better credit history.  If you have negative reporting on an old account, cancelling the account won’t take the negative reports off your record, only time will diminish their effect.

2nd Myth:  Never using or not having credit cards will improve your FICO score.

There can be a problem if you have too little credit.  This can lower your score.  Your score will improve if you build a record of maintaining your credit responsibly.  Not having any credit doesn’t help you build that record.  If you don’t have any accounts 6 months old, you might not even have a score.

Between the time your offer on a home is ratified, becoming a contract, and the time you go to close on the home, this is the time your loan is in process.  You should not do anything that will have an adverse affect on your credit score.

What kind of things have an adverse effect?  Glad you asked:

• Don’t apply for new credit of any kind.  No credit cards or lines of credit.  No new car loans.  None of that.
  
• Don’t pay off collections or charge-offs, unless your lender asks you to.  This is a hard one for people to accept.  Generally, paying off old collections causes a drop in your credit score.  When you do, it brings that particular account to the forefront of your credit.  In most cases, it counts as less of a negative, the older it is.
  
• Don’t close credit card accounts.  If you close an account, it will affect your ratio of debt to available credit which has to be under a certain ratio.  This accounts for 30% of your credit score.  If you really want to close an account, do it after you close on your home.
  
• Don’t max out or over charge existing credit cards.  Running up your credit cards is the fastest way to bring your score down; it can drop up to 100 points overnight.  You should try to keep your credit cards to below 30% of the available credit limit.
  
• Don’t consolidate debt to one or two cards.  Again, you don’t want to change your ratio of debt to available credit.  You also want to keep your good credit history on the books.
  
• Don’t raise red flags to the underwriter.  Don’t co-sign on another person’s loan, or change your name or address.  The less activity that occurs while your loan is in process… the better.

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The Highland Group