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Buying a Home? Separate Credit Fact from Fiction.

Alerus | SEP 18, 2017

Establishing and maintaining good credit is one of the most important things you can do if you’re planning on financing a home. In the sea of information and misinformation available about credit management, it can be hard to distinguish fact from fiction, myth from reality. Let’s try to debunk a few of those myths in this post.

MYTH 1: CLOSING AND CONSOLIDATING CREDIT CARDS LEADS TO A CLEANER CREDIT REPORT
In reality, if you close out credit cards you aren’t using and open up a new one to consolidate all purchases onto one card, you could be lowering your credit score – substantially. Closing cards reduces the number of credit lines you have, and opening the new card results in a short credit history with a new creditor. Here’s one example scenario showing how this could affect your mortgage: Shortly before applying for a mortgage, Jim gets annoyed with his bank and closes all his accounts, including a credit card with 10 years of use. Then he opens a new card with another institution. The limited history of his new card and the absence of other active accounts resulted in a lower credit score – and a higher interest rate on his mortgage.

MYTH 2: HAVING NO CREDIT IS THE SAME AS HAVING A CLEAN CREDIT HISTORY
In reality, you must have a credit history in order to receive a credit score. Many lenders require that you have at least 3 “trade lines” to be eligible for a mortgage. Trades lines can be car loans, student loans, or credit cards, for example, and often they want the lines to be at least 12 months old. In other words, lenders look for a proven ability to manage credit before approving your mortgage.

MYTH 3: YOU SHOULD PAY OFF ALL OTHER LOANS BEFORE APPLYING FOR A MORTGAGE
In reality, lenders want proof that you can manage credit, which is best shown by consistently making on-time payments. For example, imagine Jane, a younger borrower who has been paying student loans for a few years and doesn’t have much other credit. If she pays off those loans completely and then the mortgage lender runs a credit report a few months later, the lack of recent credit activity could mean there is no credit score available for her!

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