Mythical credit scores

Castles in the Sand

Generally, credit scores are available through one of your credit card companies, financial institution or loan statement, and if you don’t know yours you should make a point of finding out even if you have to pay a fee. You are entitled to a free credit report from the three national credit bureaus annually, but they do not contain credit scores.

One of the most misunderstood aspects of mortgage financing is the mystical credit score. Many people applying for credit, whether it’s home financing, automobile financing or credit cards, are terrified of what their credit score is and how it will impact their ability to be granted a loan.

Credit score ranges start at 300 and go up to 850. 740 to 799 is very good and is where 25 percent of people are and 800 to 850 is exceptional and is where 20 percent of people are. Obviously, you want to acquire a credit score as high as possible as it will not only affect your ability to borrow money but also getting accepted for an apartment, deposit waivers on services as well as enticing potential employers.

There is, however, a lot of misinformation about credit scores. For instance, future homeowners worry that shopping around for a mortgage will hurt their credit score. Not true, the scoring models assume you’re going through a shopping process and will bundle these requests into a single inquiry.

Another one is understanding the difference between a hard inquiry and a soft inquiry. A hard inquiry is when you’re trying to refinance your mortgage or sign up for a store credit card, those inquiries could drop your score a few points whereas a soft inquiry could be a background check or a utility company setting up a new account.

Also, many people believe that carrying a balance on a credit card is good for the credit score, but here again it doesn’t help. Keep in mind that it is important to utilize your credit but not to max out your credit. A rule of thumb is to use less than 30 percent of your available credit each month and ideally less than 10 percent.

What is very important is to pay your bills on time and have mature credit accounts with a diverse range of loan products. This shows good handling of debt and experience with the use of credit. Also, asking for a credit limit increase can be one of the fastest and easiest no-cost ways that anyone can help their credit score.

What is at the bottom of the list of bad things to do to drop your credit score is a foreclosure and bankruptcy. Late mortgage payments, collections especially if a lender takes a loss, foreclosures and chapter 13 bankruptcies hurt your credit score for seven years. A chapter seven bankruptcy will hurt it for 10 years. If you mismanage your credit and get in one of these positions, you can pretty much kiss your new home goodbye.

Finally, take advantage of your free credit report annually. Credit card companies make mistakes and you might catch a fraudulent use of a credit card or new inquiry for credit. If you know you will be applying for a home loan, it might also be a good idea to purchase a credit monitoring service, so you know immediately if there is a mistake or some hanky-panky on your credit report.

Knowing ahead of time will save you a lot of grief down the road when your home loan or car loan or student loan is turned down for something you’re not responsible for.

Staying informed is the best defense against the mythical credit score monster.

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