You see an advertisement that exclaims “Bad Credit Gone Forever!” for a company that pledges to erase all the negative information from your credit report and guarantee you a mortgage loan. Does it sound too good to be true? It is.
Credit and Mortgage Scams
In addition to the above scenario, thousands of homeowners facing foreclosure have received phone calls, brochures, and emails from scam artists who are anxious to profit from the rise in loan defaults. Many of these conmen will make promises to stop the foreclosure process and raise your credit score ― but don’t be fooled. At best, they may do nothing more than pass information along to a bankruptcy attorney and collect a referral fee from the distressed homeowner. [See related article “Beware of Bank Foreclosure Scams”]
Improving Your Own Credit
Since the information regarding bank foreclosures is available to the public, it’s relatively easy for con artists to obtain mortgage details and then contact the borrowers, offering to solve their financial problems. However, you must understand that when it comes to restoring your credit, the best strategy is to work on improving it yourself. After all, there’s no reason to pay someone for something you can do better on your own.
Three Different Credit Scores
There are several other myths about credit and mortgages that you should be aware of as a prudent consumer. One misconception is that the three major credit reporting bureaus (Equifax, Experian, and TransUnion) produce substantially different credit scores. While it’s unlikely that your three scores will be the exact same, these bureaus use the same formula to calculate credit, so you shouldn’t see a lot of variation. If there’s a big discrepancy between your scores, it may be due to an error on your credit report or because one bureau received information from your creditor(s) that the others did not. In any case, you should contact the appropriate bureaus and work to resolve the issue before applying for a mortgage loan.
Closing Idle Accounts
Another credit and mortgage myth is that closing old credit accounts and zero-balance accounts will improve your credit score. However, closing an account means you are cutting off your access to that credit ― and one of the main factors that determines your credit score is how much credit you have available compared to how much you are actually using. If you are close to your credit limits or “maxed out,” you are considered a high-risk borrower.
Shopping Around for Mortgages
A common misconception is that shopping around for a mortgage will damage your credit score. Each time you seek a new source of credit (e.g., apply for a credit card or mortgage loan) that request shows up as an “inquiry” on your report. Thus, submitting multiple mortgage applications will result in credit inquiries by various lenders which can lower your score. However, there is an exception for comparison shopping which allows you to make multiple credit requests in a short period of time and count them as one inquiry.
Therefore, if you’re going to apply for a lot of loans, you should do it in a very short period of time. If your inquiries are spread out, each request will appear separately on your report and lower your score. Your credit report will count multiple credit requests as only one inquiry as long as they’re all done within a 14-day period. Additionally, there is a 30-day buffer for scoring, which means that your credit score will not reflect any inquiries made in the past 30 days. This allows consumers to approach mortgage lenders and shop around for the best mortgage rates without being penalized.
Expecting Immediate Results
Many people also believe that paying off their credit cards and other installment loans will immediately raise their credit score. But if you want a better credit score for mortgage applications, you’ll need to give yourself at least a few months to work on improving it. Your credit score won’t transform overnight ― but with some time and effort you can clean up your credit history, pay down your debts, qualify for lower interest rates, and save a lot of money in the long run.