Credit scores play a critical role in your financial health, but they are often surrounded by myths and misconceptions that can lead to poor decision-making. Misunderstanding how credit works can prevent you from taking the right steps to improve your financial standing. Let’s dive into five of the most common credit myths and uncover the truths behind them.
Myth 1: Checking Your Credit Report Will Hurt Your Score
The Myth
Many people believe that simply checking their credit report or score will negatively impact their credit. This misconception often stems from confusion about the difference between a “hard inquiry” and a “soft inquiry.”
The Truth
Reviewing your own credit report or score is considered a soft inquiry, which does not affect your credit score. Soft inquiries occur when you check your credit, or when lenders perform pre-approvals or background checks.
In contrast, hard inquiries occur when you apply for new credit, such as a credit card, loan, or mortgage. Hard inquiries may lower your score slightly, but usually by only a few points and for a limited time.
Why It Matters
Regularly checking your credit report is one of the best practices for maintaining good credit. It allows you to:
- Identify inaccuracies that could harm your score.
- Spot signs of fraud or identity theft early.
- Monitor your progress toward financial goals.
You are entitled to a free annual credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion. Use this opportunity to stay informed without fear of affecting your score.
Myth 2: Closing Old Credit Cards Improves Your Credit Score
The Myth
Some believe that closing unused credit cards will improve their credit score, thinking it simplifies their financial profile or demonstrates responsible credit use.
The Truth
Closing an old credit card can actually hurt your score, especially if it is one of your oldest accounts or has a high credit limit. Credit scores are influenced by several factors, including:
- Credit Utilization Ratio: The amount of credit you’re using compared to your total credit limit. Closing a card reduces your total available credit, which can increase your utilization ratio and lower your score.
- Credit History Length: The longer your credit history, the better it is for your score. Closing an old account can shorten your average account age, negatively impacting your score.
Why It Matters
Keeping old credit cards open—even if you don’t use them frequently—can help maintain a lower utilization ratio and a longer credit history. However, if the card carries high annual fees or you find it difficult to manage multiple accounts, consider alternatives like downgrading to a no-fee option.
Myth 3: You Need to Carry a Balance to Build Credit
The Myth
One of the most pervasive credit myths is that you must carry a balance on your credit card to build or maintain good credit. Some believe this demonstrates regular credit usage and helps improve their score.
The Truth
Carrying a balance does not help your credit score—in fact, it can hurt it. Credit card companies report your account activity to credit bureaus whether you carry a balance or pay it off in full. The two key factors in your score that are affected are:
- Payment History: Consistently paying your balance on time is the most significant factor affecting your credit score.
- Credit Utilization Ratio: Keeping your balances low (ideally below 30% of your total credit limit) improves your score.
Carrying a balance can lead to unnecessary interest charges and increase your overall debt burden, making it harder to manage your finances.
Why It Matters
Paying off your balance in full each month is the smartest financial move. It not only boosts your credit score but also saves you money on interest and keeps your debt under control.
Myth 4: All Debts Are Bad for Your Credit
The Myth
The word “debt” often carries a negative connotation, leading many to assume that having any type of debt is harmful to your credit score and overall financial health.
The Truth
Not all debt is bad. In fact, responsibly managing certain types of debt can improve your credit score and demonstrate your creditworthiness to lenders. There are two main types of debt to consider:
- Good Debt: This includes mortgages, student loans, and business loans—debt used to invest in your future. When managed responsibly, these can help build a positive credit history.
- Bad Debt: High-interest consumer debt, such as unpaid credit card balances, is considered bad debt because it doesn’t contribute to long-term financial growth and can quickly become unmanageable.
Credit scores are influenced by how well you manage debt, not by the mere presence of it. Paying debts on time, keeping balances low, and avoiding unnecessary borrowing are key to maintaining a healthy score.
Why It Matters
Understanding the difference between good and bad debt helps you make smarter financial decisions. Using credit responsibly can be a powerful tool to achieve long-term financial goals, such as buying a home or starting a business.
Myth 5: Your Income Directly Affects Your Credit Score
The Myth
A common misconception is that higher income equates to a better credit score, while lower income leads to a poor score.
The Truth
Your income is not directly factored into your credit score. Credit scores are calculated based on your credit behavior, such as:
- Payment history.
- Credit utilization.
- Length of credit history.
- Types of credit in use.
- Recent credit inquiries.
While your income can influence your ability to pay bills on time, it is not a metric used by credit scoring models like FICO or VantageScore.
Why It Matters
Regardless of your income level, maintaining good credit habits—like paying bills on time and keeping debt levels low—can lead to a strong credit score. This debunks the myth that financial success is solely tied to how much you earn.
How These Myths Can Impact You
Believing in credit myths can lead to poor financial decisions, such as unnecessarily closing accounts, carrying balances that cost you extra in interest, or avoiding regular credit checks. By understanding the facts, you can take control of your credit and make informed choices that benefit your financial future.
Key Takeaways
- Regularly Check Your Credit: Stay on top of your credit profile without worrying about soft inquiries affecting your score.
- Keep Old Accounts Open: Maintaining older credit cards helps with credit history length and utilization.
- Pay Off Balances in Full: Avoid carrying balances to save on interest and boost your score.
- Manage Debt Responsibly: Distinguish between good and bad debt to make smart financial choices.
- Focus on Habits, Not Income: Your behavior, not your income, determines your credit score.
Empower Yourself with Knowledge
By debunking these common myths, you’re already on your way to better credit management. Understanding how credit works allows you to take charge of your financial health, avoid costly mistakes, and unlock opportunities for a brighter financial future.
If you’re ready to take the next step in improving your credit, contact CreditRevive Solutions for expert guidance and personalized support. Together, we can help you achieve your financial goals!