The mysterious credit score is misunderstood by a shocking number of Americans. Did you know that 4 in 10 Americans never bother to check their credit scores? Nearly everyone knows they have a credit score and they probably venture to explain their credit as horribly bad, decent or great. Sadly enough, oftentimes these are just guesses. Most people don’t bother taking the time to check their credit score on a regular basis and many have fallen for common credit score myths.
When it comes time to purchase a home for sale, knowing your credit score and actually reviewing your credit report is vital. Below are some of the common myths surrounding credit scores and the actual facts to set the story straight.
Myth #1: Paying your bills on time will give you a good credit score
This myth is partially true, to some extent. While making payments on time is important, it’s not enough to give someone good credit. The fact is that 30% of the credit score is based on what’s known as the utilization ratio. This simply means the ratio of how much available credit has been used at any given time. Therefore, making timely, yet minimum payments each month will do little to help improve a credit score. Large amounts of debt carried on credit cards are a higher risk to the credit bureaus and will reflect poorly on the overall credit score. What will help is making timely and additional payments to reduce the overall debt.
Myth #2: You have to make a huge financial mistake to ruin your credit
This myth is completely false. While major financial downfalls such as a bankruptcy or foreclosure will have a huge negative impact on a credit score, other relatively minor blunders will also drag down a credit score. Making a payment late just one time can be detrimental and so can opening too many of those retail store credit cards just to get a one-time discount. Consistency with on-time payments and establishing a long credit history will be helpful to improving a credit score.
Myth #3: You can improve bad credit quickly
This myth is also false. Sadly, it takes just one late payment to ding your credit score. Something more serious such as a foreclosure will remain on your credit report for a long 7 years. Even though mistakes can lead to lower credit scores, it doesn’t mean recovery is impossible. The formula for calculating a credit score places more weight on recent transactions. Therefore, if you went through a challenging period of financial instability or irresponsibility, all is not lost. The best way to improve a credit score is by being consistent with paying everything on time from now on and by paying down large balances to improve the utilization ratio.
For anyone considering purchasing a home for sale it’s important to know and understand the mystery of the credit score. Checking credit in advance of applying for a mortgage will help the potential buyer better understand their real estate buying power.
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