There are many myths and misconceptions about credit, which, unfortunately, too many buyers looking to buy a home learn about the hard way–at the time they apply for a loan. Below are 5 of the most common myths, which your lender will gladly dispell for you.
Myth No. 1. Having no debts or credit cards makes me creditworthy.
This is certainly one of the most prevalent, especially among buyers who went through a financial crisis, such as bankruptcy or foreclosure, or who deal in cash because of their cultural upbringing. The problem with this when you need a home loan is that lenders want to see that you can manage credit. If you have no credit, you have nothing to manage. In that case, a buyer generally will not even have a credit score. With some exceptions, having no score is worse than having a low score.
Myth No. 2. Even though I generally max out my credit card, I always pay it off every month.
One factor in the credit scoring process is the percentage of the credit card balance to the credit limit. Creditors report at different cycles, and they generally report before they send you the bill. So, if your card is almost maxed out at the time it is reported, this will reduce your credit score because of the high balance to credit limit. A good rule of thumb is to make sure that at any given time, you do not charge more on your credit card than 30% of the credit limit, better yet, 10%.
Myth No. 3. I am planning to apply for a home loan so I will clean up my credit by paying off the collection account and judgment that appear on my credit report.
If you have a medical collection or a judgment, the amount of the balance may not really affect your credit score that much. Balances are given more weight on revolving accounts. What is given more weight is the date of last activity (DLA). This has to do with your payment history, which represents 35% of your credit-score! So, if you recently paid off that judgment or collection account, which may have been 5 years old, you have just renewed that account and reduced your credit score, at least, in the short run. If you plan to apply for a loan any time soon and are aware of derogatory information in your credit report, it is best to review this with your lender or a credit repair specialist before you pay off anything.
Myth No. 4. I have a couple of credit cards, but I keep them just for emergencies and don’t use them.
This is no better than having no credit at all. Again, you have to show you can manage credit. Just because at one time you qualified to get a credit card doesn’t matter. Even if you have just one credit card, you are best to use it sparingly for incidentals (groceries, gas), and pay it off monthly, if you don’t like carrying debt.
Myth No. 5. I don’t have credit now. So, I can’t get it.
Well, it’s true it’s harder to get credit when you have none. Even if you’ve been a student or have gone through bankruptcy or a foreclosure, most banks or credit unions will offer you a secured credit card. This is one that is secured by your savings account in which a balance must be maintained in an amount equal to or greater than the credit card limit. The secured credit card may only have a limit of $300 or $500, but just using this on a monthly basis, again, keeping balances under 30% of credit limit, will start to develop or restore your credit and obtain a credit score. It actually is not a long process, either.
Don’t let myths like the above, or any other assumptions about credit, take you by surprise or jeopardize your ability to qualify for the best loan possible. For more information about these myths and other steps you can take to confirm or improve your creditworthiness, meet with a reputable lender well before you start your home search. Doing this before you get pre-qualified for a loan will ensure your buying process is faster and smoother for all involved.
If you are not already working with a reputable, trusted mortgage lender, contact me today to refer you to one. I know several good ones!