The most important factor in determining your mortgage interest rate is your credit score. Credit scores are the basis for deciding if a loan is granted and on what terms. Here are some of the myths and realities about credit scores.

Myth #1: Closing accounts will increase your credit score.

Many people believe that closing accounts can hurt a borrower’s score. It is believed that having too many lines of credit is a bad thing. But, there are two reasons why closing accounts can actually hurt a score. First, closing accounts will reduce your available credit. Since a credit score measures the difference between available and used credit, balances seem larger when available credit is reduced. Second, credit scores take into account the length of time a you have had credit. Closing accounts can make your credit history appear shorter than it is, thereby reducing your credit score.

Myth #2: Checking your credit hurts your score

There are two types of inquiries that can be made into a credit file – a hard inquiry and a soft inquiry. A hard inquiry happens when you apply for credit, as in applying for a credit card or a mortgage. Consumers who open multiple lines of credit in a short term are deemed risky, thus the score gets lowered. A soft inquiry happens when you or anyone else simply wants to check out your credit score. Credit card companies do this when determining whether or not to send you a solicitation for a credit card. When a mortgage broker asks to check your credit score, it is treated as a soft inquiry, thus not having any impact on your score.

Myth #3: Married couples have merged credit scores

Married couples have separate credit files, and thus, separate credit scores. When applying for a mortgage, a couple can apply as a borrower and co-borrower, with separate credit information. You can not get a better average score by merging their individual credit scores. However, if the couple has any joint accounts, the credit information will appear on both accounts. If one spouse has poor credit, it is recommended that that spouse be removed from the credit application.

Myth #4: Disputing information removes it from your credit reports

If there is an error on your credit report, a dispute should be filed with the credit issuer. The issuer has 30 days to investigate and validate the dispute. After 30 days, the dispute is either resolved or removed from the credit report. If the information is valid, it will not be removed. Many borrowers assume that if a dispute is made, the information will be removed. You can not dispute valid information that is hurting a credit score and expect to have it removed.

Myth #5: A higher salary means a higher credit score

Your salary has no bearing to your credit score. A borrower with a high salary and a high debt load may have a lower score than someone with a lower salary who lives within his or her means.

Myth #6: Maxing out credit cards will improve credit

This can and will have a negative impact on your credit score. It is one of the worst things a borrower can do with his or her file. Maxing out cards increases the borrower’s debt load while reducing the available borrowing room. This reduces the likelihood of timely repayment, making you more risky to a lender. What are the lessons to be learned here? To maximize your score, keep at least 2 credit card accounts open and in good standing, and keep your credit card balances at or below 30% of your available credit.

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