Myths About Credit Scores: 10 That Cost Home Buyers Money

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Most myths about credit scores sound reasonable, which is why they stick around. Some are harmless. Others push people to close the wrong account, skip shopping for a better mortgage rate, or pay a company for something they could do free.

I’ve been a mortgage loan originator for 38 years, and I still hear these every week. Here are the ten that do the most damage, what’s actually true, and what to do instead.

Myth 1: Checking your own credit score lowers it

The truth: Checking your own score or report is a “soft inquiry,” and soft inquiries never affect your score. You can check every day if you want.

Only a “hard inquiry” can lower your score, and that happens when you apply for new credit and the lender pulls your report. A single hard inquiry typically costs a few points, and FICO only counts inquiries from the last 12 months, even though they stay on your report for two years.

What to do: Watch your score regularly. Free tools like Credit Karma show your VantageScore without any effect on your credit.

Myth 2: You only have one credit score

The truth: You have dozens. FICO and VantageScore each have several versions in use, and each one can be calculated from your Experian, Equifax or TransUnion report. That’s why the score in your app rarely matches what a lender sees.

Mortgage lenders usually pull three older “Classic FICO” scores and use the middle one. Here’s why your credit scores are different and which one lenders use.

Myth 3: Closing old credit cards helps your score

The truth: Closing a card usually hurts. It removes that card’s limit from your total available credit, so your utilization (the share of your limits you’re using) goes up. Over time it can also shorten the average age of your accounts.

What to do: Keep old no-fee cards open, and use them for a small purchase every few months so the issuer doesn’t close them for inactivity. If a card has an annual fee you don’t want to pay, ask about switching to a no-fee version instead of closing it.

Myth 4: Paying off a collection removes it from your report

The truth: A paid collection usually stays on your report for up to seven years from the original missed payment. It will show as paid, which looks better to a lender reviewing your file.

How much it helps your score depends on the model. FICO Score 9, FICO 10 and VantageScore 3.0 and 4.0 ignore paid collections. The older Classic FICO versions most mortgage lenders still use may not. Many mortgage programs also require certain collections to be paid or resolved before closing, so talk to your loan officer before you pay one off.

Myth 5: Carrying a balance builds credit

The truth: You never need to pay interest to build credit. Your card reports your statement balance to the bureaus whether you pay it in full or not. Paying in full every month builds the same payment history without the interest.

A high reported balance actually works against you. Most experts suggest keeping utilization under 30%, and people with the highest scores tend to stay under 10%.

What to do: If you’re about to apply for a mortgage, pay your cards down before the statement closing date, not just the due date. That’s the balance that gets reported.

Myth 6: Your income affects your credit score

The truth: Your income isn’t on your credit report, so it can’t affect your score. A person earning $40,000 can have an 800 score, and a person earning $400,000 can have a 600.

Income matters a great deal to a mortgage lender, but it’s measured separately through your debt-to-income ratio. Your credit score shows how you’ve handled credit. Your income shows whether you can afford the new payment.

Myth 7: Shopping around for a mortgage will wreck your score

The truth: Credit scoring models expect you to shop. FICO treats multiple mortgage inquiries within a short window as a single inquiry. That window is 14 days on older versions and 45 days on newer ones. VantageScore uses a 14-day window.

Not shopping can cost far more than a few points. Rates and fees vary between lenders, and even a small rate difference adds up over 30 years.

What to do: Do your rate shopping within two weeks to be safe. Better yet, use a broker that compares many lenders with one application. At The Rate Update, one application and one credit pull compare 30+ lenders.

Myth 8: Paying rent and using a debit card builds credit

The truth: Not automatically. Debit cards never report to the credit bureaus. Rent and utility payments usually don’t either, unless your landlord or a rent-reporting service sends them.

This is starting to change. VantageScore 4.0 can count rent, utility and phone payments when they’re reported, and Fannie Mae and Freddie Mac now accept VantageScore 4.0 for eligible mortgages. See how VantageScore 4.0 works.

What to do: If you have little credit history, look at a credit-builder account or ask your landlord about rent reporting. Compare Self and Credit Strong.

Myth 9: A credit repair company can erase bad credit

The truth: Nobody can legally remove accurate, timely negative information from your report. Credit repair can help when your report has errors, such as an account that isn’t yours, a late payment you made on time, or a debt listed twice.

You can dispute errors yourself for free with each bureau. A credit repair service saves you the time and paperwork. If you use one, avoid any company that guarantees results or asks for payment before doing any work. Dovly is one option that finds and disputes errors for you, and here’s how to fix your credit in 4 steps on your own.

Myth 10: You need a perfect 850 to get the best mortgage rate

The truth: On conventional loans, the best credit pricing starts at 780. A score of 780 and a score of 850 typically get the same pricing from Fannie Mae and Freddie Mac. Below that, pricing changes in steps, so moving from 718 to 720 or 738 to 740 can lower your cost.

You also don’t need a high score to buy. FHA loans allow scores as low as 580 with 3.5% down, and many conventional programs start at 620. See the credit score needed for each loan type.

The bottom line

Credit scores reward a few simple habits: pay on time, keep balances low, keep old accounts open and apply for new credit only when you need it. Most myths lead people away from those habits.

If you’re planning to buy a home, start by seeing where you stand. Follow the 5-step plan to get mortgage-ready.

Frequently asked questions

What are the most common myths about credit scores?

That checking your own score lowers it, that closing old cards helps, that carrying a balance builds credit, that your income affects your score, and that shopping for a mortgage will wreck your score. None of these is true.

Does checking my credit score lower it?

No. Checking your own score is a soft inquiry and has no effect. Only applications for new credit create hard inquiries that can lower your score.

Does closing a credit card hurt my score?

Usually, yes. Closing a card lowers your total available credit, which raises your utilization, and it can shorten the average age of your accounts over time.

Will shopping for a mortgage hurt my credit?

Very little. FICO counts multiple mortgage inquiries within 14 to 45 days as one, depending on the version. VantageScore uses a 14-day window.

Does my income affect my credit score?

No. Income isn’t on your credit report. Lenders look at income separately when they calculate your debt-to-income ratio.

What credit score gets the best mortgage rate?

On conventional loans, the best credit pricing typically starts at 780. Scores above that don’t usually get a better rate.

Dan Frio | NMLS #246527 | PBT Bancorp | NMLS #257781 | Equal Housing Lender. Mortgage products are originated by PBT Bancorp, NMLS #257781. Loan programs, credit requirements and pricing vary and are subject to change. Not all borrowers will qualify.