The Truth About Credit Scores

If you are thinking of purchasing a home and applying for a loan, there are many misconceptions about how scores are calculated and how factors such as having multiple credit cards play in. Below are some common things to know so you can be prepared when getting a loan.

Ownership of several credit cards can hurt your credit score
Mostly false. Having many credit lines isn’t necessarily a bad thing, says credit expert Liz Weston, author of Your Credit Score. Multiple lines give you a favorable debt-to-available-credit ratio. But use them correctly: It’s best to keep any balances below 10% or 20% of the total credit line, she says. Anything more will affect the ratio of debt-to-available-credit, which can decrease your credit score.

Opening and closing credit lines can hurt your credit score
True. New credit applications can decrease your credit score, so be careful about applying for new credit cards or personal loans before applying for a HELOC, second mortgage, automobile loan, or other large line of credit. Surprise: Closing existing credit lines may also hurt your credit score, since it’ll damage your debt-to-available-credit ratio. A good rule is not to make any credit changes in the months leading up to a major credit request, such as for a HELOC.

Consolidating credit lines will help your credit score
Mostly false. Although it may seem like a good idea to move all your balances to one card, that can actually hurt your credit score, since your debt-to-available-credit ratio will spike on that card, says Weston. However, credit expert Harrine Freeman says such a slight decline isn’t necessarily a deal-breaker for a loan, especially if the card has a lower interest rate and will allow you to pay off the balance sooner. Your score will increase as soon as that ratio goes down.

Changing jobs can hurt your credit score
Partly true. Taking a new job or losing your job doesn’t affect your credit score. However, if you have a spotty employment history, lenders may hold that against you in making a loan. Dips in income may signal that it could be difficult to pay bills in a timely manner.

Co-signing for others can hurt your credit score
Partly true. Simply co-signing on a loan for someone else may not affect your score, but if that person is late on paying the loan, it’s likely to show up on your report, says Freeman. And that’s a nasty surprise if you didn’t know the person was late.

Judgments and liens aren’t considered in your credit score
False. If you’ve had a judgment or lien filed against you, it’s considered in your payment history, which represents 35% of your score. Similarly, while most utility companies don’t report payment history to credit bureaus, your account will likely be reported if it is seriously delinquent and referred to a collection