10 common myths about your credit score

Anyone looking for a mortgage (or other loan) needs to worry about credit scores. But how much do you really know about your score? Take this quick test and see.

1. If I pay my credit card bill in full each month, that will significantly improve my credit score.    
 True    False

2. Any time I miss a bill payment, my credit score is negatively affected.    
 True    False

3. If my income goes up, so does my credit score.    
 True    False

4. I can use an online service and find out what credit score my lender will see.    
 True    False

5. If I miss a payment, my credit score will be lowered until I make it up.    
 True    False

6. My credit score will be better if I have a long history at one job, rather than a history of job-hopping.    
 True    False

7. I recently bought a car but I paid cash for it, so my credit score won’t be affected.    
 True    False

8. Getting rid of old credit cards I don’t need will boost my credit score.    
 True    False

9. Information never stays on my credit report for more than seven years.    
 True    False

10. Every 20-point improvement in my credit score means I’ll qualify for a lower mortgage rate.    
 True    False

...the answers

You might be surprised to discover that each of these statements is false…at least in part.

1. If I pay my credit card bill in full each month, that will significantly improve my credit score.

Not true. Credit bureaus have no idea whether you pay your credit card bill in full. All they know is whether you make the minimum payment, which is the total amount you “owe.” Of course, it’s always wise to pay your bill in full - it just won’t affect your credit score.

2. Any time I miss a bill payment, my credit score will be negatively affected.

That’s true only for bills involving a repayment of credit - such as a mortgage, credit card, or auto loan. But if you’re late on your rent or on your phone or cable bill, it won’t affect your credit score.

3. If my income goes up, so does my credit score.

Not true. The credit bureaus don’t know what your income is. They only know whether you pay your bills on time.

4. I can use an online service and find out what credit score my lender will see.

Not necessarily. The actual score your lender receives will depend on the type of lender and which credit bureau is reporting it. If you buy a score online, it will likely be close, but it might not be the exact number obtained by the lender.

5. If I miss a payment, my credit score will be lowered until I make it up.

Actually, your credit score will probably be affected way beyond the date when you make up the payment. Late payments can lower your score for a full year. Very late payments can lower it for up to three years, and being sent to collection can lower it for up to seven years.

6. My credit score will be better if I have a long history at one job, rather than a history of job-hopping.

Not true. Credit bureaus don’t know or care how long you’ve been at your job. They only care whether you’re making your bill payments on time. Of course, your lender might want to consider your job history when deciding whether to give you a loan - but it won’t be factored into your credit score.

7. I recently bought a car but I paid cash for it, so my credit score won’t be affected.

It probably won’t - but some auto dealers will check your credit even if you don’t apply for a loan, and that inquiry can lower your score. Similarly, some banks will check your credit if you apply for a checking account. Car dealers and banks won’t necessarily tell you if they’re going to make a credit inquiry, so you might want to ask them upfront.

8. Getting rid of old credit cards I don’t need will boost my credit score.

False! In fact, it will probably hurt your score. A major factor in determining your score is the ratio of the amount you’ve borrowed to the amount of your available credit. By closing an inactive account, you reduce the amount of your available credit, which means this percentage goes up. Also, another factor in determining your score is the age of your credit accounts. Closing an old account will hurt you more than closing a newer one.

9. Information never stays on my credit report for more than seven years.

It’s generally true that bad information gets wiped out after seven years, but good information can stay around much longer. A closed account in good standing can stay on your record for up to 10 years. And if you’ve had the same credit card for 20 years, that will help you by lengthening the average age of your accounts.

10. Every 20-point improvement in my credit score means I’ll qualify for a lower mortgage rate.

Generally, a better score means a better interest rate - but if your score is already up in the mid-700s, improving it further likely won’t make much of a difference. If you’re at 800 and you’re striving to get to 820, that’s terrific - but it probably won’t affect your loan rate.

New limits on FHA-backed mortgages

The Federal Housing Administration, which insures up to a third of all new mortgages, has adopted some limits on the mortgages it will insure.

The FHA doesn’t make loans, but it insures loans made by other lenders in order to encourage lenders to give mortgages to people with shaky credit or little in the way of a down payment. The new restrictions will make it somewhat harder for such people to get mortgages.

The changes are:

• Borrowers with a credit score below 580 will have to come up with a 10% down payment. This is an exception to the general rule that FHA borrowers need only a 3.5% down payment.
• The “upfront” insurance rate for FHA backing will rise from 1.75% to 2.25%. Borrowers usually pay for FHA insurance in one of two ways: either with a monthly fee or “upfront” by rolling it into the loan amount. Borrowers who pay a monthly fee shouldn’t see any change, but borrowers who roll the insurance into the loan will have to borrow more - about $1,000 on a $200,000 mortgage.
• A seller can pay only up to 3% of the home’s value as a contribution toward closing costs - down from 6% previously. This will make it harder for borrowers who want to pay “points” at closing in order to obtain a lower interest rate.

These changes are all designed to make it less likely that borrowers will get a mortgage they can’t afford, and subsequently default.

Another change will help borrowers, though. Previously, the FHA had an “anti-flipping” rule that said you couldn’t get an FHA loan for a property that had previously changed hands within the last 90 days. The problem with this rule is that it usually meant you couldn’t get an FHA loan for a foreclosed home - and these types of home are often very desirable for less wealthy purchasers.

So the FHA has waived the rule until February 1, 2011. (However, the rule still prohibits FHA backing for sales between family members, and there are restrictions if the sale price is 20% more than what the seller paid for the property.)

Amount you can borrow with a reverse mortgage reduced by 10%

The amount that homeowners can borrow with a reverse mortgage has been reduced by 10% by the Federal Housing Administration.

The new rule applies only to reverse mortgages obtained after October 1, 2009. If you took out a reverse mortgage before that date, you won’t be affected. But if you want to take out a new FHA-insured reverse mortgage, the maximum amount you can borrow will be 10% less than it was.

A significant number of people won’t be able to borrow enough with a reverse mortgage to pay off the existing mortgage on their property.

In a traditional mortgage, you borrow money against your house and pay it back in monthly installments over time. With a reverse mortgage, you borrow money against your house, but you don’t have to pay it back until you die, sell the house, or move, which means you don’t owe anything as long as you stay in your home. In most cases, you must be at least 62 years old to qualify.

Due to a roughly $800 million government shortfall, the FHA announced that it will tighten its borrowing limits. This means that a significant number of people won’t be able to borrow enough with a reverse mortgage to pay off the existing mortgage on their property.

Real estate quips

“A man complained that [on] his way home to dinner he had every day to pass through that long field of his neighbor’s. I advised him to buy it, and it would never seem long again.”
                                        - Ralph Waldo Emerson

“Everyone says buying your first apartment makes you feel like an adult. What no one mentions is that selling it turns you right back into a child.”
                                        - Anderson Cooper