Mysteries of your credit report

As a Mortgage Loan Officer, everyday I review credit reports and advise clients of the myths and mysteries of their credit. Here is a list of some of the most common items I see and deal with daily:

1. Inquiries lower your credit score. There are two types of inquiries. One is “soft”, where you pull it yourself. This has no effect. The second is a “hard” inquiry, when a lender reviews your report.  It has really no effect UNLESS you have a lot of inquiries in 90-days most recent to the inquiry.  Then it may have a very minor effect on your overall score.  For 95% of the people 95% of the time, having someone look at your credit report means nothing.

2. Income effect score: The credit bureau does not consider income. They have no idea if you make a million a year or no job at all. .

3. Close credit card is smart. Maybe. But be careful. You have to have credit to get credit, and part of your score is longevity. On time payments on a card you’ve had for 10-years is much better than on time payments on a card you’ve had two months. The credit bureau will tell you they like to see a well rounded person. A mortgage, a car loan, and a few credit cards is what they think is perfect.

4. All credit scores are the same. There are three major credit reporting agencies (Experian, Equifax, and Transunion). They use similar, but use different algorithms to calculate your credit score. There are different systems for different vendors. For example, mortgage scoring is different than car loan scoring.  To make it worse, most of the online providers of credit scores use something known as an Advantage score, which is a different score than your lender obtains.

Credit cards and Credit Scores5. Paying bad debt fixes your credit. Paying collections and charge off’s is always better, but paying them doesn’t make them go away. They still occurred, so they can still hurt. Standard late payments remain for up to 7-years. Bankruptcies and foreclosures remain for at least 10-years.

6. My bad credit hurts forever.  It can effect you for awhile, but time can heal the damage. Make sure you have no more new negative items, have some current credit, make sure you pay the credit on time, and keep credit card balances very low.  Doing these items will repair even the worst of credit in just a few years.

8. Max’ed out credit cards I pay off monthly helps builds credit. Wrong – and big time wrong. Whatever balance is on the monthly statement is what gets reported to the credit bureau. This makes it look like you always carry a high balance, hurting your score. Find out what day of the month your bill is generated, and pay it off a day or two earlier. This way it looks like you carry little to no balance each month.

9. Disputing negative information is smart. Maybe. If it is legitimately wrong, by all means, dispute it. Disputing is what most credit repair companies try when promising to clean up your credit report. But lenders are getting smarter about the tricks. An unpaid disputed item on your credit report can now cause you major problems when applying for a mortgage loan.

10. All late payments are reported. You may pay a late fee, but generally speaking, a late payment isn’t reported to the credit bureau unless you are over 30-days late.

Follow this link for more information about your credit scores.

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