Credit scores and reports are vital to your financial well-being, influencing everything from loan approvals to interest rates. Despite their importance, myths about credit scores and reports persist, often leading to misconceptions that can harm one’s financial health. Keep reading as we debunk some of the most common credit myths, helping you understand what truly does influence your credit and how to manage it effectively.
1. Myth: Checking Your Credit Score Hurts It
Reality: Checking your own credit score, within an app or online, does not impact your credit.
When you check your credit score through a personal finance app, bank, or credit bureau, it’s known as a “soft inquiry,” which doesn’t affect your score. In contrast, a “hard inquiry,” which occurs when a lender pulls your credit during a loan application, can temporarily lower your score by a few points. Monitoring your credit score regularly is a helpful tool to keep you aware of any changes and detect signs of fraud.
2. Myth: Closing Old Credit Cards Will Improve Your Credit Score
Reality: Closing old credit accounts can actually harm your credit score.
The age of your credit accounts plays a part in your overall credit score, specifically in the “length of credit history” category, accounting for about 15% of your FICO score. When you close an account, it can lower the average age of your accounts, which could hurt your score.
Additionally, closing a card reduces your available credit, which then raises your credit utilization rate (the amount of credit you’re using versus your total available credit). High credit utilization can lower your score, so keeping old accounts open can be beneficial.
3. Myth: Carrying a Balance on Your Credit Card Helps Your Score
Reality: Carrying a balance doesn’t help your score; it only leads to unnecessary interest payments.
Some believe that carrying a small balance from month to month can improve their credit score, but this is not true. Credit bureaus evaluate your payment history and credit utilization rather than whether you carry a balance. Paying off your full balance each month and keeping credit utilization low are better ways to positively impact your score without incurring interest charges.
4. Myth: You Only Have One Credit Score
Reality: You actually have multiple credit scores, each calculated by different models and credit bureaus.
There are several different scoring models (such as FICO and VantageScore), and each of the three major credit bureaus (Experian, Equifax, and TransUnion) may report different scores based on the information they have. Lenders may use any of these scores to evaluate creditworthiness, so you might see slight variations depending on the model and bureau. While each score might differ slightly, they all reflect the same overall credit behavior, so keeping good credit habits will positively impact all versions of your score.
5. Myth: Your Income Directly Affects Your Credit Score
Reality: Income is not a factor in determining your credit score.
While income plays a role in a lender’s assessment and your chances of approval for specific loan terms, it doesn’t impact your credit score.
Your individual credit score is made up of a combination of your credit history, including payment history, credit utilization, account age, credit mix, and recent inquiries. However, a higher income could help you reduce debt levels and improve your score over time.
6. Myth: Paying Off Debt Immediately Improves Your Credit Score
Reality: Paying off debt can improve your credit score over time, but it doesn’t result in an instant boost.
While paying down debt is one of the best ways to improve your credit over time, it doesn’t always lead to an immediate increase in your score. The impact depends on various factors, including the type of debt paid off, your overall credit history, and whether the account remains open. Over time, reduced debt levels and consistent payments will positively impact your score, but patience is required.
7. Myth: Using a Debit Card Builds Credit
Reality: Debit card transactions don’t impact your credit score.
Unlike credit cards, debit card transactions don’t report to credit bureaus and, therefore, do not influence your credit score. Debit cards are tied directly to your checking account, so they don’t demonstrate your ability to manage debt responsibly, which is a critical aspect of credit scoring. If you are eager to build credit, consider using a credit card and ensure you make on-time payments and keep balances low.
8. Myth: All Debt Is Bad for Your Credit Score
Reality: Not all debt is harmful to your credit score; responsible debt management can be beneficial.
While excessive debt can harm your credit, managing different types of debt responsibly can improve your score. For instance, having a mix of credit types can prove to prospective lenders that you can manage various types of debt, which can boost your score. However, high credit card balances, missed payments, or an unmanageable debt load can negatively impact your credit.
9. Myth: You Need to Go Into Debt to Build Credit
Reality: You can build good credit without going into debt.
While credit bureaus track how you manage debt, it’s possible to build credit without carrying debt. Opening a credit card, making small purchases, and paying off the balance completely each month can help you build and begin to establish a positive credit history without accumulating debt.
Another great option is applying for a secured credit card, which we have covered before.
10. Myth: Credit Repair Companies Can Quickly Fix Your Score
Reality: Credit repair companies cannot instantly fix your score, and they don’t have access to special tools or methods beyond what you can do yourself.
While some credit repair companies may help you navigate issues on your credit report, they can’t “fix” your score quickly or remove accurate negative information. Credit repair companies are known for charging high fees for actions you can take on your own, like disputing inaccuracies or setting up a plan to pay down debt. The best way to improve your score is by adopting good credit habits, such as making on-time payments and keeping credit utilization low.
11. Myth: Once You’ve Damaged Your Credit, It’s Impossible to Fix
Reality: Damaged credit can be rebuilt over time with consistent, responsible habits.
Although negative information like missed payments or collections can remain on your report for several years, it’s possible to improve your credit score with positive actions. By making timely payments, reducing debt, and avoiding new negative entries, you can gradually rebuild your credit. While it takes time, lenders tend to weigh recent behavior more heavily, so consistency can help you improve your score even after past issues.
12. Myth: Your Credit Report Is Always Accurate
Reality: Errors on credit reports are more common than you might think, so it’s essential to review your report regularly.
Mistakes can happen on credit reports due to clerical errors, outdated information, or even identity theft. Common errors include incorrect personal information, duplicate accounts, and inaccuracies in reported payments. Regularly reviewing your credit report helps identify these errors and dispute them to ensure your score accurately reflects your financial behavior.
13. Myth: Married Couples Share a Joint Credit Score
Reality: Each person has an individual credit score, even if they are married.
Credit scores are unique to each individual and don’t automatically merge when you marry. However, joint accounts or shared debts, like a mortgage or credit card, can affect both partners’ scores. For example, if one spouse misses payments on a joint account, it may negatively impact both individuals’ scores. To keep credit healthy, married couples should communicate openly about shared finances and credit responsibilities.
Stay Informed, Don’t Be Fooled By Misinformation
Understanding the realities behind these common credit myths can empower you to make informed decisions about your financial health. Monitoring your credit, managing debt responsibly, and debunking these misconceptions can help you achieve and maintain a strong credit score.
Remember, your credit score is a tool that reflects your financial behavior; with consistent positive actions, you can maintain or improve it, unlocking better financial opportunities along the way.
You might also be interested in: The Impact of Late Payments on Your Credit
