Watch Out For These Credit Score Myths

Your credit score plays a crucial role in the home buying process, from determining loan approval to influencing interest rates. However, misconceptions about how credit scores work are widespread and can lead to unnecessary stress or financial missteps. If you're looking at homes for sale in St. George, make sure you understand your credit score and how to boost it. Let’s set the record straight by debunking some common credit score myths.

Myth: Checking Your Credit Score Hurts It

Many people avoid checking their credit score, fearing it will lower their number. This is only partially true, and it can confuse and mislead consumers. In reality, there are two different types of inquiries that check your credit score:

• Hard inquiries, like those from lenders when you apply for a loan or credit card, can temporarily lower your score.
• Soft inquiries, such as checking your own score or pre-qualification offers, have no impact on your credit.

Regularly monitoring your credit score is a soft inquiry, and a smart financial practice that helps you stay informed and spot inaccuracies.

Myth: Closing a Credit Card Will Improve Your Score

It might seem logical to close unused credit cards to streamline your finances, but this can actually hurt your credit score. Closing an account reduces your available credit, which can increase your credit utilization ratio (the amount of credit you’re using compared to your total available credit). A high utilization ratio can lower your score. It can also shorten your credit history, especially if the closed card is one of your oldest accounts. Length of credit history is a factor in your score.

So, instead of closing the account, consider just leaving it unused. If you are tempted to use it and want to avoid that, just take the card out of your wallet and place it somewhere safe, but you don't need to close the account. 

Myth: You Need to Carry a Balance to Build Credit

This is one of the most persistent credit myths. Carrying a balance on your credit card does not improve your credit score. In fact, it can cost you unnecessary interest payments.

Instead, to effectively build credit, regularly use your credit card for small purchases and pay off the balance in full every morning. Consistent, responsible use demonstrates your creditworthiness without incurring irresponsible debt.

Myth: Paying Off Debt Instantly Fixes Your Credit Score

While paying off debt is an essential step toward improving your financial health, it doesn’t always result in an immediate boost to your credit score. Credit reporting agencies update your information monthly, so it may take time to reflect your reduced balances.

Keep in mind that the type of debt also matters. Paying off credit card debt can lower your credit utilization ratio and improve your score relatively quickly. Paying off installment loans (like car loans or mortgages) can close the account, which may have a neutral or minor impact on your score.

Myth: You Can't Buy a Home without Excellent Credit

While a higher credit score increases your chances of securing favorable loan terms, a lower score doesn’t automatically disqualify you. Some lenders specialize in loans for individuals with less-than-perfect credit, and government-backed loans, like FHA or VA loans, usually have more flexible credit requirements. Before you assume your credit score is too low, talk with a few mortgage lenders to see what your options are. 

Ready to learn more about owning a home in St. George? Contact us any time.