4 Common Credit Scoring Myths to Know Before Buying a Home

Hopeful home buyers worry about a variety of obstacles that may hinder their purchasing plans. Unfortunately, along with these valid worries, there are also some common recommendations concerning your credit score that can range from somewhat untrue to completely false.

Consumers who fall for these misconceptions can end up hurting their credit scores instead of helping them, and derailing their purchasing process.

Don't let it happen to you.

Perk up your ears, sit back, and increase your home buying savviness by understanding these common credit scoring myths, and knowing how to finesse your way around and over them. As always, consulting with a professional is always recommended to find exactly what will work for your specific situation.

#1: "Just become an authorized user" 

Many times, home buyers try to get added as an authorized user to someone they know who has a credit card, thinking this will boost their credit score. These people are usually parents, partners, close friends, or other family members. The perception is that the home buyer will benefit from the other person's credit history, increase their credit score, and set them up to be a shoe-in for landing their mortgage loan. 

Is this myth true? Halfway. 

What is meant here is that becoming an authorized user may possibly help the home buyer's credit score.

If the original owner of the credit card has had the line of credit opened a long time, kept the balance low, and made the payments on time, then becoming an authorized user would have a positive effect on the prospective buyer's credit score, especially for someone who has little or no credit, or hasn't had credit very long (under ten years). 

However, if the original credit card holder has maxed out the limit, paid late, or the card hasn't been opened long, getting added as an authorized user can actually decrease a person's credit.

Bottom line: If you are thinking about asking a friend or loved one if you can be added on one or more of their accounts as an authorized user, make certain the card has been open at least ten years, they have paid it on time, and their balance is no higher than 10% of their limit. 

#2: "I must pay off my old collections right now"

When a person's thoughts turn to buying a home, they naturally think they should handle old debts, and pay off collections. The idea is that when they go to the mortgage company or bank, there aren't collections following them info the purchasing process. Some may even believe paying off old collections will help increase their credit score. 

Is this myth true. No.

Credit scoring formulations consider the most recent actions first, and assign the them the most weight. Consumers often don't realize that, by paying an old collection, it brings the "Date of Last Activity' to the present, as if the collection just happened. This, unfortunately, can tank a person's score up to 100 points!

Bottom line: If your credit report is showing any collections that are two years old or older, leave them alone. While you may be required to pay them at closing (depending on the amount owed), paying them rarely increases your credit score, and will most likely send it plummeting. 

#3: "I can use my credit cards now"  

Another common credit scoring myth is a consumer can utilize their credit during the home buying process. Prospective home buyers who begin the mortgage process and get pre-approved frequently take for granted it's a "done deal." They may begin thinking about buying new furniture, choosing new carpet, or even charging supplies to get their current home ready to sell. The idea here is that their credit score is high enough, and nothing can change that. 

Is this myth true? No.

Credit scoring formulations are fluid, which means they change as new information is added to the credit file. If a credit card had a low balance during the pre-approval process, and it's maxed out or a hefty purchase is added on it, this affects the credit utilization ratio" which decreases the score. 

For example, a credit card with a $5000 limit and a $500 balance has a credit utilization ratio is 10%. This low ratio helps have a good score. However, buy 4000 dollars of furniture, the balance swells to 4500, or a 95% credit utilization ratio. This can possibly have a negative impact on the credit score. 

Another key insight into this myth is that the mortgage company may, depending on the the type of loan, check the consumer's credit right before closing. Not only may the credit score be lower, it can throw off the other ratios, which can sometimes reduce the likelihood of closing on the home. 

Bottom line: Once you commit to the home buying process, it is typically a good idea to keep your spending low, and only charge on your credit cards in emergencies. 

#4: "I need to work with the first bank that pulls my credit"

Smart consumers know they need to be careful of allowing too many creditors to pull their credit, as numerous inquiries are figured into the credit scoring formula and negatively impact their score. People interested in buying a home sometimes feel they shouldn't agree for banks to pull their credit in the beginning, because they don't want their credit to be affected by multiple inquiries. 

Is this myth true? No.

The good news is that the credit scoring formulations designate a shopping period of approximately 30 days for mortgage loans. That means if consumers visit two, three, four, or more banks and each one pulls their credit, these inquiries will usually only count as one inquiry, and should have little effect on the score. 

Bottom line: Don't feel locked into the first mortgage originator you meet. Shop around and find the one who suits your needs and answers your questions. 

A plethora of factors weigh into a successful home buying process. By educating yourself up front, you will be prepared for the common credit scoring myths, and won't let them derail your dream of home ownership.