CREDIT SCORING MITHS

CREDIT SCORING MITHS:

There's a lot of misinformation being propagated about what does and doesn't hurt your credit score, and much of it is coming from sources who should know better: mortgage lenders.
Now, let me say first that I've worked with several excellent lenders who really knew their stuff and kept up to date, not only on loan trends but on the information that's available about credit scoring. That's important, because the FICO credit score, in its various permutations, is used in three-quarters of all mortgage lending.
But what I heard from several lenders responding to my recent column, "8 big mortgage mistakes and how to avoid them," was the kind of bad advice that can cost you money and keep you from getting the best loans. So if your mortgage broker gives you any of the following advice, take a tip from me: Find a new broker. No, no, no. For the umpteenth time: Closing accounts can never help your credit score, and may hurt it.

Every time I write this, I get more e-mail from people who say their mortgage lenders told them exactly the opposite. It's true that having too many open accounts can hurt your score. But once you've opened the accounts, you've done the damage. You can't repair it by shutting the account, and you may actually make things worse.The credit score looks at the difference between your available credit and what you're using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.

The score also tracks the length of your credit history. Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score.
Of course, credit scores aren't the only thing lenders look at when making decisions. They typically consider other factors, such as your income, assets, employment history and credit limits. Mortgage lenders in particular might look at your total available credit and ask you to close a few accounts as a condition for getting a loan.
But if your goal is to improve your credit score, you generally shouldn't close accounts in advance of such a request. Instead, pay down your credit card debt. That's something that actually can improve your score.

Unfortunately, I heard this one from a mortgage broker who is otherwise pretty smart. He was confused about which type of inquiries hurt your score and which don't.
Applying for new credit is generally what hurts your score. Ordering a copy of your own credit report or credit score doesn't count. Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also aren't going to hurt you, either -- unless you actually take them up on their offers.
If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO score treats multiple inquiries in a 45-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.