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Don't Trust Whispers

When I was a young whippersnapper, I played a game with my fellow whippersnappers –both boys and girls –called Telephone Line.  I’m sure most of you have played this game in one form or another, whether it was called “Telephone Line” or something else.  You would sit in a circle –the more people the better –and one person would start the game by whispering a phrase like “my dog has fleas” into the ear of the person to her/his right (or left, depending on your political leanings).  The person in whose ear the phrase is initially whispered turns to the next person in the circle and repeats that phrase in a whisper, and the game follows in that manner until the phrase has been passed to the last person in the circle.  At that point, the final person in the circle repeats out loud the phrase as she/he understood it.  

Ninety-nine times out of one hundred, the original phrase changes rather dramatically through repeated retellings usually due to poor hearing, muffed whispers, possible regional accents, and the kid who’s chewing a wad of bubble gum while passing the phrase along to her/his circle mate. And when it gets to the end, “my dog has fleas” has become “the designated hitter rule has ruined the game of baseball” (or something along those lines).  Sure, it’s possible that you have one smart aleck kid in the middle of the line who purposefully changes the phrase (I don’t know anyone who would do that), but this usually happens because humans are involved –and humans, the well-intentioned beasts that we are, just don’t have a corner on the market of perfection.  That’s how myths and misconceptions come into existence –and the mortgage world is certainly not immune to them.  Let me address just two myths concerning credit scores.  

Myth #1: having your credit report pulled by a lender will hurt your credit score.  That’s a bold-faced lie!  Honestly, it’s PARTIALLY true, but it’s not NEARLY as adverse in its effects as so many rampantly believe.  The true part is simple: when you have a lender pull your credit report, this signals that you’re considering as assumption of debt, so the credit scoring trolls who live under a bridge (in a van down by the river) note that you’re displaying “risky” behavior.  However, the REAL TRUTH is that such a pull doesn’t knock your score down into basement –and along those same lines, if you have your credit pulled by multiple lenders in a short period of time because you’re shopping for the best mortgage provider, those pulls will only be viewed as one action.  

Myth #2: closing out credit cards will improve your score.  Paying them off, yes, will improve your score, but closing them can actually HURT your credit score. In general, credit scoring models don’t measure risk by how much credit you have availablebutrather by how much of that credit you’re using – a ratio known as “credit utilization”. When you close an unused account, you reduce your total available credit, so your credit utilization goes up.  The trolls don’t like things that go up. 

The moral here, of course, is don’t believe everything you hear/read (except this column because this is the absolute truth, of course).  Ask questions and investigate so you can be better informed –but be careful who you ask because it might be that kid with the giant wad of gum in his mouth all grown up, and you won’t understand a word he says. 

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