Your credit score plays a crucial role in your financial health, influencing everything from loan approvals to interest rates and even job opportunities. However, there are plenty of myths and misconceptions about how credit scores work, leading many people to make financial decisions that could hurt them in the long run. Believing these myths can keep you from maximizing your score and achieving your financial goals.
In this post, we’ll debunk some of the most common credit score myths and provide you with the facts you need to manage your credit wisely.
Myth #1: Checking Your Credit Score Lowers It
One of the most common misconceptions about credit scores is that checking your own score will cause it to drop. This myth likely stems from confusion between hard inquiries and soft inquiries.
A hard inquiry occurs when a lender or creditor checks your credit report as part of a loan or credit application. These inquiries can slightly lower your score, especially if multiple hard inquiries happen within a short period. However, a soft inquiry happens when you check your own credit score or when a company pre-approves you for an offer. Soft inquiries have no impact on your credit score.
Regularly monitoring your credit score is actually a smart financial habit. It helps you stay informed about your credit health, catch errors early, and track your progress over time. Many banks and financial institutions offer free credit score monitoring, so take advantage of these tools without worrying about any negative effects.
Myth #2: Closing Old Credit Cards Improves Your Score
Many people believe that closing old credit cards will boost their credit score, but in reality, it can do more harm than good. While it may seem logical to close an unused account to simplify your finances, this decision can negatively impact two important credit factors: credit history length and credit utilization ratio.
Your credit history length makes up a significant portion of your credit score. The longer your accounts have been open and in good standing, the more favorably it reflects on your creditworthiness. When you close an old credit card, you shorten the average age of your credit accounts, which can lower your score.
Additionally, closing a credit card reduces your overall available credit. This, in turn, increases your credit utilization ratio, which is the percentage of your available credit that you’re using. A high utilization ratio can signal to lenders that you’re over-reliant on credit, which may lower your score.
Instead of closing old credit cards, consider keeping them open and using them occasionally for small purchases. This ensures the account remains active while helping maintain a strong credit history and low utilization ratio.
Myth #3: You Need to Carry a Balance to Build Credit
A widespread misconception is that carrying a balance on your credit card helps build your credit score. In reality, this is unnecessary and can actually cost you money in interest payments without providing any real benefit to your credit.
Your credit score is primarily influenced by factors such as payment history and credit utilization, not by how much interest you pay. Making full, on-time payments each month is the best way to build and maintain a strong credit score. Carrying a balance, on the other hand, leads to accumulating interest charges, which can make it harder to pay off debt and may even increase your credit utilization ratio if the balance grows too high.
If you want to build your credit effectively, focus on using your credit card responsibly—making small purchases and paying them off in full each billing cycle. This demonstrates to lenders that you can manage credit well while avoiding unnecessary interest payments.
Myth #4: Only High Incomes Lead to Good Credit Scores
Many people assume that a high income automatically translates to a good credit score, but this is not the case. While income can affect your overall financial stability, your credit score is not directly based on how much money you make. Instead, it is determined by factors such as payment history, credit utilization, length of credit history, credit mix, and recent inquiries—none of which require a high salary to manage effectively.
A person with a modest income who consistently pays their bills on time, keeps their credit utilization low, and maintains a long credit history can have a much higher credit score than someone with a high income who frequently misses payments or maxes out their credit cards. Lenders use credit scores to evaluate financial responsibility, not wealth.
While income does play a role in lending decisions—such as determining how much credit you qualify for—it does not impact your score. This means that anyone, regardless of their income level, can achieve and maintain a strong credit score by practicing good credit habits.
Myth #5: Paying Off Debt Immediately Boosts Your Score
Many people assume that paying off a large debt—such as a credit card balance or loan—will instantly improve their credit score. While eliminating debt is always a positive financial move, the impact on your credit score is not always immediate or as significant as you might expect.
Credit scores are calculated based on multiple factors, including payment history, credit utilization, length of credit history, credit mix, and recent inquiries. While paying off a credit card balance can lower your credit utilization ratio, it may take some time for credit bureaus to update your report and reflect these changes in your score. Additionally, paying off an installment loan (such as a car loan or mortgage) can sometimes lead to a slight decrease in your score because it reduces your credit mix, which is another factor in your overall rating.
Instead of expecting an instant boost, focus on consistently practicing good credit habits over time. Keeping utilization low, making on-time payments, and maintaining a diverse mix of credit accounts will have a more lasting impact on your score than any single debt payment.
Conclusion
Understanding how credit scores work is essential for making informed financial decisions. Many common myths—such as the belief that checking your own score will lower it, or that you need to carry a balance to build credit—can lead people to take actions that may actually hurt their financial standing.
The truth is, building and maintaining a strong credit score comes down to responsible credit management: making on-time payments, keeping credit utilization low, maintaining long-standing accounts, and having a healthy mix of credit types. Income level and immediate debt payments do not guarantee a high score, but consistent good habits do.
By separating fact from fiction, you can take control of your credit and make choices that will benefit your financial future. Stay informed, monitor your credit regularly, and focus on long-term credit health rather than quick fixes.
Frequently Asked Questions (FAQs)
1. How often should I check my credit score?
You should check your credit score at least once a month to monitor changes and catch any potential errors. Many banks and financial institutions offer free credit score monitoring, making it easy to stay informed.
2. Will applying for multiple credit cards hurt my score?
Yes, multiple hard inquiries within a short period can temporarily lower your credit score. However, if you space out credit applications and use new credit responsibly, the impact is minimal.
3. Does paying rent or utilities help build my credit?
Typically, rent and utility payments are not reported to credit bureaus unless you enroll in a service that reports them. Some credit-building programs can help include these payments in your credit history.
4. How long do negative marks stay on my credit report?
Most negative items, such as late payments or collections, stay on your credit report for seven years. Bankruptcies can remain for up to 10 years, but their impact lessens over time.
5. What’s the fastest way to improve my credit score?
The quickest ways to boost your score include paying off outstanding debts, lowering your credit utilization (keeping balances below 30% of your credit limit), and ensuring all payments are made on time.