The Truth about Your Credit

by Michael Eastham, CPA CRMS

Understanding your credit profile and managing it in a responsible way is something that every person should take very seriously.   Like many people, you may not realize that your credit profile (typically summarized by what is called a FICO score) is the primary factor that a lender considers when reviewing your request for a mortgage.  It is literally your “report card” when it comes to how you manage your finances and obligations. Your credit report also discloses any information that is filed on public record, including judgments, bankruptcies and foreclosures.  Many myths have been propagated about the impact that certain actions can have on your credit.  Below are just a few:

Closing accounts will improve your score:  It is true that having too much open credit can lower your score.  However, once the account is open, the damage is already done.  The FICO score evaluates the amount of outstanding credit compared to total available credit.  If you close accounts, you reduce the amount of available credit and consequently increase the ratio.  The higher the ratio, the lower the score.

Checking your own credit can hurt your score:  False.  When you check your own credit it does not count in the calculation of your credit score.  What will hurt your credit is applying for all of those credit cards that offer you free trinkets or “0%” financing for balance transfers.  Each one of these companies will pull your credit before actually issuing that credit card that you have been “preapproved” for.  The FICO score calculation will consider multiple credit inquiries in a short period of time as a single inquiry.  Therefore, if you are shopping for a mortgage, make sure that you compare lenders within a short window of time.

Consumer Credit Counseling won’t hurt my credit:  As far as your FICO score is concerned, the scoring model does not even consider references to Consumer Credit Counseling in the calculation.  The problem that occurs that will affect your score is if the Credit Counseling Company does not make the payments to your vendors on time.  This will simply be treated as a late payment by the scoring model.  However, on the flip side and more important is the fact that most mortgage lenders will treat a Consumer Credit Counseling case the same as a Chapter 13 bankruptcy.  Another little known truth is that most of the Consumer Credit Counseling companies are owned by Visa and MasterCard.  This is an easy way for them to soften their collection efforts and still recoup some of their losses.

A major mistake that many people make is to wait until they have found a house before applying for a loan.  It is often times like these that “surprises” show up on your credit report.  These unknowns can have an impact on the cost of your loan or may even affect your ability to get approved.  It is a much better strategy to get preapproved for your mortgage before you put a contract on your new home.  This is a proactive approach that ensures you have time to address any issues that come up before you close on your loan.