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Credit Myths Revealed!

Mortgage and Lending with H&R Block

I've been getting a lot of clients lately that have a lot of misconceptions about their credit scores and what they mean to them as well as how to make them go up or come down. I try my best to counsel these people and let them in on as many secrets as our conversations will allow me to, as I believe credit reports and FICO scores should be a class taught in High School! I want to just touch briefly on some of the key points that consumers should be weary of to keep their credit scores as high as they can be!

RULE # 1: DO NOT, UNDER ANY CIRCUMSTANCES, max out your credit cards! The average consumer I come into contact with believes they are given credit for one reason, to USE it. On the contrary they should narrow that conception to use SOME of it. As long as you keep your balance at or below 50% of your limit, your credit card use won't hurt you and in fact will help! The Fair Isaac Corporation, or FICO uses a formula to determine your credit scores, A.K.A FICO scores. No one knows EXACTLY what the formula is and it changes constantly, but we DO know that keeping your balances BELOW 50% on your credit cards gives you "positive points" while going above your limit, deducts points from your score.

Rule # 2: LATE PAYMENTS aren't LATE until 30 days after their DUE DATE! A large and growing number of consumers tend to believe that if they are even one day late on their payments, they will be marked late on their credit reports. I don't know how many people will answer, "I've been a couple of days late on my payments, so I have no idea what my credit score is" to the question, "What do you think your credit is like?" I don't think consumers realize that the only time you are marked late on your credit report is when you are 30 days or more down on a payment. This of course doesn't mean you should be more relaxed on paying your bills, but don't sweat it if you are a few days late! Another point I should bring up is that most banks will see a consumer being late 2 months in a row as a "rolling late," meaning you were late with the first payment, and then by the time you made the first payment, the second one was already due. So really you were only one payment behind....so you were really only late once, as long as you continue making your payments afterwards.


Rule # 3: CREDIT PULLS HURT YOUR CREDIT- EVERY TIME- IT IS PULLED.  99% of my clients believe that every time their credit is pulled, their score drops. This is the single BEST kept secret held by FICO! This is the proverbial mind blower! Almost everybody I talk to believes their score drops with EVERY PULL, when in actuality, the FICO people know that a consumer is going to want to shop for their credit and in fact it is advisable for every consumer to do so. HOWEVER, according to the Fair Isaac Corporation, you shouldn't HAVE TOO MUCH credit, because of course, they know your spending can get out of control. So they devised a simple loophole to make it fair to the consumer while keeping the balance of their super sensitive formula intact. AFTER AN INITIAL CREDIT INQUIRY FOR A SPECIFIC TYPE OF CREDIT, YOUR SCORE WILL NOT DROP MORE THAN THE ONE TIME INITIATED BY THE FIRST PULL FOR 14 DAYS, AS LONG AS YOUR CREDIT IS BEING PULLED FOR THE SAME TYPE OF CREDIT!  This means that if, for instance, you are shopping for a mortgage, you can have your credit pulled an infinite number of times ONLY by other mortgage companies and brokers, without your score dropping any more than the few points deducted with the initial pull! BEWARE, however, of companies that lend more than one TYPE of credit. These companies, such as Beneficial for instance, can lend you a mortgage, a personal loan and a line of credit. This means that when THEY pull your credit, the FICO corporation can not discern between the TYPE of credit you are applying for and the type of credit they lend. This could count as a negative pull and in turn effect your score!  

These are only 3 of the rules of the FICO formula. Of course there are dozens more where those came from, but I find that these 3 have a lot of myths and misconceptions associated with them. If you have any questions, or if anybody else has any other facts they believe should be shared, then please do so by all means! I find it troubling that consumers are scored by a formula they know little or nothing about and yet it weighs so heavily! Now a days you can't even get a job at some places without having good credit! So let's crack the codes and tell the secrets so all of us can have better credit. Just paying your bills doesn't always guarantee good credit! Just look at the credit card rule! Even if you pay that credit card bill and every other bill reporting on your credit, if you max out your cards every month, or have maxed them out and only make the minimum payment every month, your credit score may not be considered "lend-able." Who knew? Well perhaps, now you are one of them! 


John Bohannon
White Star Mortgage - Marietta, GA
 It is becoming increasingly our job to help repair credit as well as pull it! Knowing how to do this and evaluating when a client needs to go to reputable credit repair is vital to getting our borrowers the best interest rates and loan programs.  
Apr 15, 2008 10:44 AM