7 Credit-Building Myths First-Time Homebuyers May Hear (and Believe) Today
People love to dole out unsolicited advice. Some of it is actually useful. Other tips you hear, though, may do more harm than good—particularly when it comes to your credit score.
Establishing credit and maintaining a good credit score (also known as a FICO score) is essential if you hope to get a mortgage to buy a home someday.
“Good credit proves to lenders that you’re a reliable and trustworthy person who will pay back the money you owe,” says Ace Watanasuparp, national director of strategic sales at Citizens Home Mortgage.
Having good credit helps you not only get a mortgage, but one with a low interest rate, which will lower your monthly payments and the overall amount you pay for the home. And even if your credit score isn’t stellar right now, Watanasuparp says it’s never too late to start repairing it.
Yet this is where bad advice from uninformed yet well-meaning friends and family could lead you astray. Want some guidance separating fact from fiction? Here’s a look at some of the worst credit-building advice floating around out there that actually isn’t true.
1. To build credit, you’ve got to use credit—lots of it!
Many may insist that the only way to establish good credit is to use it—liberally. While it’s true that utilizing some level of credit is important, more is definitely not better.
“Carrying a high balance on your credit card has the potential to hurt your score,” says Stephen Rosen, head of sales at the mortgage company Better. “And on top of that, you will end up paying more each month, due to interest.”
Credit utilization, or the amount of credit you’re using, makes up 30% of your FICO score. The higher your credit card balance, the higher your utilization rate, which hurts your credit score. So pay as much as you can on your credit card bill each month.
That said, keeping a modest credit card balance can help, Watanasuparp says. A good rule is to use only 30% to 40% of your maximum credit line. So, for a credit card with a $10,000 limit, keep the balance to no more than $3,000 or $4,000.
2. Close your credit cards once you pay them off
Closing a credit card once you’ve paid it off may seem like a logical thing to do—that way, no more debt! Yet in reality, closing cards is a bad idea.
“Closing recently paid off accounts can shorten your credit history, especially if it’s one of your oldest accounts to date,” Rosen says.
Credit history, or how long you’ve had credit accounts, makes up about 15% of your credit score.
Instead of closing the cards, Watanasuparp suggests keeping them open and using them from time to time—and always paying off the balance whenever possible.
3. The occasional late or missed payment is no big deal
Late or missing bill payments happen to just about everyone, and therefore may seem like NBD. On the contrary! Paying your bills on time has a huge effect on your credit, accounting for 35% of your FICO score.
It doesn’t matter how much credit you have, as long as you can manage it, meaning you have enough money to pay your bills and that you’re paying them on time, Watanasuparp says.
“It becomes a problem when you are not able to responsibly manage these lines of credit, and you start falling behind on payments, and you no longer have the funds to back your credit,” he says.
Consistently paying late or not at all suggests that you might not be able to make your mortgage payments either, so it could be tough to get a home loan. Setting up automatic payments or calendar reminders will help you avoid missing payments.
4. You can boost your credit score by adding your spouse to your accounts
If your spouse has excellent credit—but yours is subpar—you may have heard that adding your upstanding partner to your own credit accounts will help raise your own score. Sorry, but it’s not that simple.
Credit scores are unique to each individual, Rosen says, so merging accounts won’t boost your credit. However, there is one way a high-scoring partner does work in your favor.
“When it comes to applying for new credit with your partner, such as filling out a joint application for a mortgage, each partner’s credit score is taken into consideration by the lenders,” he says.
Lenders will often average out a couple’s scores to determine your overall creditworthiness as a team. So in this sense, your partner could help you get a loan with good terms.
Once you’ve got a loan together—and if it gets paid on time—this will start reflecting positively on both your credit reports. This takes time, however, so don’t expect any miracles overnight.
5. You should constantly check your credit report
These days, sites like CreditKarma.com make it easy (and free) to check your credit score and report on a daily basis. But that doesn’t mean you should.
Watanasuparp says you only need to check your credit score and report once a year—or every three to six months before getting a mortgage—to make sure there are no errors or late payments that you’re not aware of.
6. Getting a credit report will lower your score
The good news is that checking your credit yourself through an official report from one of the primary reporting agencies is a soft inquiry, which won’t affect your credit score.
However, loan applications for new credit cards or mortgages are considered hard inquiries, and will show up and stay on the report for up to two years, briefly lowering your score.
“My advice is to avoid loan applications for at least six months before you apply for a mortgage. This will ensure your best possible credit score is on file,” Rosen says.
Then, you can shop around with multiple lenders to find the one offering the best rate.
7. You need to hire a credit repair agency to clean up your credit
Credit repair agencies promise to repair your credit for a fee, by checking your credit report for errors and disputing them for you. However, it’s usually unnecessary.
You can dispute information on your credit report yourself for free, using AnnualCreditReport.com, a federally authorized site.
Furthermore, no one can remove accurate information, such as a history of late payments, from the report, Rosen says.
“There’s nothing that a credit repair company can do for you that you can’t do yourself,” he says. “The only legitimate way to enhance your credit score is to practice good credit management.”