If you’re thinking of buying a condo, you may be worried about your credit score. That magical number lenders will look at to determine if you’re worth lending money to.  If you read our advice for first-time condo-buyers, you may have noticed that 6 of the 8 tips dealt with money or credit.

Having a good credit profile is critical to securing a mortgage.  If you can’t get a good mortgage, your condo buying options become limited.

But like like most things relating to real estate, there’s a lot of bad information floating out there.  Some of it by people who may mean well but are confusing certain details.

Credit scores are no exception, especially when it comes to what affects them and how to make them better.

Myth #1: Carrying a Small Balance on Your Credit Card Is Good

Debunking: Part of your credit score reflects whether your bills are paid on time.

Carrying over a balance on your credit card implies that you haven’t paid the amount in full.

Translation: you missed a payment.

Other than lowering your credit score, the disadvantage of carrying over a small balance also means you’re paying interest.  All you’re really doing is making the credit card company richer every month!

It’s fine to have a balance on your card on a day-to-day basis, but when the bill comes in the mail, pay what you owe.

The major reason people get confused with this myth is because of the “debt utilization ratio”.  This is a percentage of what you can borrow vs what you owe.  It’s bad for your score when you are at a high ratio (ie your credit is maxed out all the time).

Myth #2: Missing a Payment by One Day Isn’t Bad, Just Repay What You Owe in Full

Debunking: You’ll get a credit hit because you missed your payment.  Credit companies deal with finance.  Finance is a world of numbers.  So playing “oopsies” won’t win you points backs and your lender won’t think you’re cute.  This isn’t your schoolyard friend who you forgot to repay lunch money to.

In a way, it’s better to eventually pay your credit cards than not, however, the “day late” still counts as a missed debt repayment.

If you’re ever in a situation where you will miss a repayment, contact your lender before the due date and explain what’s going on.  They may have a mechanism to help you out.  This might work once.  Just make sure you pay off that extension quickly and have the money for repayment after that.

Myth #3: Closing Old Cards Will Erase Any Negative History

Debunking: Yea… no.  Credit files were created for the sole purpose of tracking your credit history.  What would be the point if once you close a credit line, the negative points vanish?

Here’s what happens when you close a credit line with bad history associated to it: nothing.  All those missed or late payments stay on your file.  You could even be making things worse for your score.  By closing your credit card, you are reducing credit available to you.  This increases your debt utilization ratio.  Before we start: no this isn’t how debt utilization is calculated.  It’s just an example.

Let’s use some numbers:

Say you have 2 credit cards, one with a limit of $2,000, the other with a limit of $5,000.  There’s a a $1,000 balance on the first card.

This means that your utilization ratio for these two cards is :

$1,000/($5,000+$2,000) = 16.67%

Now let’s say you close the $5,000 card.  Your new utilization ratio becomes:

$1,000/$2,000 = 50%

Just like that, you went from 16.67% to 50%.  In other words, you went from not using that much of your credit to using nearly half of what you’re allowed to borrow.  This was just from closing a card.

By all means, if you have a credit card or loan you don’t need anymore, close it down.  There’s such a thing as having too much available credit too.  But what’s ideal is responsibly using your credit and repaying it on time.  Since that bad credit doesn’t get erased, get in the habit of meeting your repayment schedule.

Myth #4: Your Credit Score Is Perfect If You’ve Never Had Credit

Debunking: Your credit score doesn’t start at the highest number and fall from there on.  It starts neutral and is built up over time.  If you’ve never had credit, the lenders won’t know how you’ll handle it in the first place.

Would you lend your car to an acquaintance you made at the coffee shop a few minutes ago?

Why not?

Because you have no idea how responsible they are.

The same way of thinking applies to credit companies.

The easiest way to build up a good credit history is to apply for a credit card, use it conservatively and ensure you repay it in full every month.

If credit cards make you nervous, then only use them for one type of purchase.  For example, only use it when you buy gas.

This will keep your debt utilization low and guarantee that you’ll never have a high balance to pay.  Over time lenders will also see that you use credit responsibly.

Myth #5: Personally Checking Your Credit File Hurts Your Score

Debunking: There are two types of checks that are logged in your credit history.  One type is when you check your own score.  The other is when a lender is seeking access to your file because you’re looking for a new loan.

The second type is what affects your score (not by much) because it signals that you’re applying for a new loan.

For some, that check happens once, they get the loan and move on.  For others, they get rejected by one lender, go see another, get rejected again.  Rinse and repeat until they finally get a loan.

This is when damage is done since it leaves a trace in your file that other lenders didn’t think you the borrower was worthy of a loan.

You should be checking your credit score at least once a year.  If you detect some sort of drop it could be the result of:

• Identity theft
• An automatic repayment isn’t set up right
• A glitch happened in the system

Myth #6: Paying off a Loan Early Will Hurt Your Credit

Debunking: If you’ve read everything above, you probably know the answer by now.  It’s… wait for it… wrong!  Lenders like to see you repay your loans on time, and if possible early.  They got their money back sooner and can use it to finance other loans.  Why would they penalize you for that?

Remember that your credit score is lowered when you miss repayments.  There are no drawbacks to paying debts earlier or when you make lump sum payments.

Myth #7: Your Gender and Racial Background Affect Your Credit Score

Debunking: Banks and lenders can’t discriminate based on your gender and racial background.

First, it’s illegal.

Second, it’s not in the lender’s interest.

When an institution loans money, they generate income off the interest owed.  Financial institutions won’t miss out on a good customer no matter what the gender or background of that person is.

Wrapping This Up

Remember the whole reason why credit files were invented in the first place and you’ll quickly see that most of what people believe to be true about credit scores is wrong.  Credit scores are a numerical representation of how likely you are to repay a loan and if you’ve been a good borrower.