If you’re planning on applying for a conventional mortgage, you’re going to need a decent credit score before applying. Generally speaking, anything over 620 is needed to get approved for a conventional mortgage, though a lower score is fine for other types of government-backed home loans.
That said, you should understand what impacts your credit score and what doesn’t in order to make the right financial decisions that will ensure a healthy credit report. The thing is, there are plenty of misconceptions floating around out there regarding credit scores and what affects them.
Here are some common myths surrounding credit scores, and the truths behind them.
Myth #1. Your Credit Score Drops Every Time Your Credit Report is Pulled
The truth: Your credit score isn’t necessarily affected by the number of times that your credit report is pulled, but rather the manner in which it is pulled. A “soft inquiry” won’t affect your score, which is when you pull your own report. You’re entitled to get a copy of your credit report without penalty once every 12 months from each of the three major credit bureaus.
A soft inquiry also occurs when a creditor only looks over a part of your credit report, and is basically something that a credit card company or lender will do prior to providing pre-approval notice.
A “hard inquiry,” on the other hand, can negatively affect your credit score, and is something that happens when a creditor pulls your credit report after you apply for a credit card or loan. Even still, a hard inquiry usually only shaves a few points off your score.
Myth #2. Closing Credit Cards Will Help Your Credit Score
The truth: Your credit score won’t increase just because you close old accounts or credit cards that you don’t use. Actually, it’s generally advised that old credit accounts are left open, as closing them can lower your score. That’s because closing an account reduces the amount of available credit you have — which can boost your debt-to-credit ratio and thereby pull down your score. The longer your credit cards and accounts are left open, the better.
What does matter is how you use your credit cards. Racking up a credit card bill that’s at or near your credit limit can have a negative effect on your credit score. It’s typically recommended that you shouldn’t use any more than 30% of your available credit. If your credit utilization ratio — which is the credit card balance compared to your credit limit — is well past that mark, your credit score can suffer.
If you need to close an account, close a newer one or those with lower credit limits.
Myth #3. Paying Down Bad Debt Will Be Immediately Removed From Your Credit Report
The truth: Getting rid of any bad debt that you may be carrying is definitely a step in the right direction, but this act alone won’t necessarily boost your credit score right away. Any negative credit history, such as late payments, discharges, bankruptcies, or collection accounts can stay on credit report for as long as 10 years.
Myth #4. Your Employment History Affects Your Credit Score
The truth: It doesn’t matter what type of job you currently have or had in the past when it comes to your credit score. Your employment status has no bearing on your credit score, regardless of whether you have a high-paying full-time job or are a part-timer making minimum wage. That said, your employment will likely be looked at by a lender when you apply for a loan.
Myth #5. There is Only One Type of Credit Score
The truth: There are actually many types of credit scores produced by the credit bureaus, and every lender uses a specific one before making a credit decision. However, the type of credit score that most people think of is the FICO score, which is most often used by creditors.
Myth #6. Paying Only With Cash Can Help Improve Your Credit Score
The truth: If you have trouble with excessive spending, it might be a good idea to use cash for many of your purchases. This will help ensure you’re not spending more than you actually have, which is easy to do when you pay with plastic. However, using cash exclusively isn’t a good idea either, as it won’t help you build a good credit history.
After all, if you never use a credit card, how will the credit bureaus know how good you are at paying down your debt? When you use a credit card responsibly, your credit score increases over time, after which you’ll be better able to get approved for a conventional loan at a decent interest rate.
Myth #7. Too Many Credit Cards Can Hurt Your Credit
The truth: Having several credit cards doesn’t necessarily ding your credit score. That said, applying for too many cards within a short time period certainly can.
The Bottom Line
Understanding the truth about credit scores and what impacts them both positively and negatively can empower you to make the right decisions when it comes to your financial health. That said, paying your bills on time and in full every month on a consistent basis is probably your best bet in terms of boosting your score.
It’s also a good idea to pull your credit report once a year from one of the credit bureaus in order for you to stay in-the-know about your score so you’re well aware of your status when it comes time to apply for a home loan.