Don’t Fall for These Credit Score Myths
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Being a newbie in the credit world can mean making some mistakes in building your credit.
Not paying your credit card bill on time is the biggest mistake, and it’s a legitimate one that will cause a credit score to drop more than anything else.
Building your credit score early in life is important because lenders make decisions that involve your credit scores. Higher scores can lead to lower interest rates on credit cards and loans, so it’s important to work toward your highest score.
Falling for some credit score myths, however, because you don’t know any better as a new credit user can hurt your score. Here are three big ones to avoid falling for.
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What is a credit score
A credit score is a numerical expression based on a level analysis of a person's credit files, representing the creditworthiness of an individual. Essentially, it's a measure used by lenders to evaluate the risk of lending money to you. The score is calculated using information from your credit reports, including your payment history, the amounts owed, the length of your credit history, new credit, and types of credit used.
Credit scores can range from 300 to 850 for the most commonly used models, such as FICO Score and VantageScore. A higher score indicates to lenders that you're a lower risk borrower, which can make it easier to obtain loans or credit cards and may qualify you for lower interest rates. Conversely, a lower score can make it more difficult to get credit and may result in higher interest rates.
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Credit score myths
1. Debt is needed for a good credit score
Having high credit scores doesn’t mean you have to be in debt. Some people may tell you that you have to have a fair amount of debt to keep a credit card and that you’ll need to use your credit cards often to do this.
This is wrong. You can still live debt-free with credit cards. A good credit score isn’t determined by having continual debt but by paying down debt to a manageable level. Having too much debt will lower a credit score.
This is called credit utilization. It accounts for 30% of a credit score. It’s a good thing if done right.
Using up to 30% of your available credit, such as up to $3,000 of a $10,000 limit on a credit card, is about as high as you should go to maintain a good utilization rate and keep a score high. To get there, you’ll need to pay down your balances before your account's statement closing date.
Another way to avoid high debt is to pay your credit card balances in full each month and on time. This will leave you with a low credit utilization rate.
2. Close a credit card to improve your credit score
Like many myths, this one sounds true because it sounds like common sense. Closing a credit card should improve credit scores because you use less credit.
That sounds true, but it isn’t.
In fact, the opposite is true. Closing a credit card account can lower a credit score.
The reason is simple and related to the first myth we busted. Having one less credit card lowers your credit utilization rate, which is the percentage of your credit card limits that you’re using.
If you close a card with a $5,000 spending limit, you’re losing $5,000 in available credit, and your utilization rate will increase.
Suppose you have two cards, each with a $5,000 limit. With one card closed, your limit drops in half, and you have less available credit. That’s good, in part, because you can’t spend something you don’t have.
Then, suppose you have a $2,500 balance. Your credit utilization ratio with just one card is 50%, which is very high and will cause a credit score to drop. With two cards, your utilization ratio would have been 25% because you had a $10,000 limit for the cards. That’s below the recommended credit utilization rate.
If you close a card and never take on the extra debt it allowed you, that’s good. But if your spending habits continue and you maintain a $2,500 balance on one card with a $5,000 limit, your utilization rate will increase.
Keeping unused credit cards open will lower credit utilization.
3. Checking your credit report hurts your score
As a new credit card user, you may hear the falsehood that checking your credit reports hurts your credit score and that you shouldn’t check them. Or at least you shouldn’t check them often.
Checking your credit by yourself or a potential lender is called a credit inquiry.
Some can hurt a score. These are called hard inquiries, and they are commonly used in background checks and credit approvals to assess your risk level. Hard inquiries can deduct points from your score and remain on your credit reports for two years.
This is why it’s not a good idea to apply for many credit cards in a short time.
A soft inquiry, on the other hand, doesn’t affect your credit scores. Lenders or credit scoring models don’t see it.
Soft inquiries are when you check your credit or a lender or credit card company checks it to preapprove you for an offer. They also happen if you authorize someone such as a potential employer, though it’s worth asking if the credit check will be a hard inquiry.
You should check your credit reports at least once a year. Look for errors and work to fix any that you find. You can check your reports for free three times a year.
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Credit score truths
When it comes to credit scores, there are numerous myths that can mislead consumers about how their scores are determined and what impacts them. Understanding the truths behind these myths is crucial for managing and improving your credit health effectively.
Paying off a debt does not remove it from your credit report immediately
Paying off debts is beneficial for your financial health and can positively impact your credit score over time. However, the record of the debt, including any delinquencies, will stay on your credit report for up to seven years from the date of the first delinquency that led to the account's status. The good news is that the negative impact of these items decreases as they age.
Checking your own credit report does not hurt your credit score
When you check your own credit score or request your credit report, it results in a "soft inquiry" which does not affect your credit score. This is different from "hard inquiries," which occur when lenders check your credit as part of a lending decision, potentially causing a small and temporary decline in your score.
You don't need to carry a credit card balance to build credit
A common myth is that you must carry a balance and pay interest to build credit. In reality, paying off your credit card balance in full each month can demonstrate responsible credit management and help improve your score by keeping your credit utilization ratio low.
There is no single "universal" credit score
Consumers have multiple credit scores, as lenders use various scoring models, including different versions of FICO and VantageScore. These scores can vary based on the data in your credit reports and the scoring model used, meaning there is no one "universal" credit score for an individual.
Closing old credit accounts can lower your credit score
Closing old or unused credit accounts can negatively impact your credit score by increasing your credit utilization ratio and potentially shortening your credit history. This is because closed accounts may eventually be removed from your credit report, potentially leaving you with a shorter credit history.
Income does not directly affect your credit score
Your income level does not impact your credit score, as scores are calculated based on credit behavior and debt management. However, lenders may consider income alongside your credit score when making lending decisions, as it provides context for your ability to repay debt.
You can improve a poor credit score
No matter how low your credit score, it's possible to improve it. Effective steps include consistently paying bills on time, reducing overall debt levels, and ensuring your credit report is free from errors. These actions can gradually improve your credit score, opening up better credit opportunities.
Co-signing a loan impacts your credit score
Co-signing a loan makes you equally responsible for the debt. The loan appears on your credit report, and any negative activity, such as late payments or defaults, can negatively affect your credit score. It's crucial to understand the implications of co-signing before agreeing to it, as it can significantly impact your financial health.
Ways to improve your credit score
Improving your credit score is a crucial step toward financial health and can make it easier to qualify for loans, receive lower interest rates, and even affect your ability to rent an apartment or secure employment. Here are actionable strategies to help you enhance your credit score:
Pay bills on time
Your payment history is the single most significant factor affecting your credit score. Late payments can severely impact your score, so it's crucial to pay all your bills on time. This includes not just credit card payments and loans but also rent, utilities, and even cell phone bills. Setting up automatic payments or reminders can help ensure you never miss a due date.
Reduce credit card balances
The amount of credit you're using relative to your credit limits—known as your credit utilization ratio—is another critical factor in your credit score. Aim to keep your utilization below 30% of your credit limits. Paying down credit card balances is one of the fastest ways to improve your score. If possible, paying balances in full each month is ideal.
Avoid opening too many new accounts at once
Each time you apply for credit, a hard inquiry is made on your credit report, which can temporarily lower your score. Opening several new accounts in a short period can compound this effect. Instead, apply for new credit accounts only as needed and space out your applications.
Check your credit reports for errors
Mistakes on your credit reports can negatively affect your score. Regularly review your reports from the three major credit bureaus—Equifax, Experian, and TransUnion—for any inaccuracies. If you find errors, dispute them with the credit bureau and the creditor to have them corrected.
Pay off debt rather than moving it around
Transferring balances to avoid paying interest or to take advantage of a lower interest rate does not improve your credit score in the long run. The most effective strategy to improve your credit is by paying down the actual debt, not just moving it from one credit card to another.
Keep unused credit card accounts open
Closing unused credit card accounts may seem like a good idea to tidy up your finances, but doing so can increase your credit utilization ratio and shorten your average account age. Both of these factors can negatively impact your score. Instead, consider keeping these accounts open, especially if they have a long history.
Diversify your credit mix
Having a mix of different types of credit accounts, including credit cards, installment loans, finance company accounts, and mortgage loans, can positively affect your credit score. This shows lenders you can manage different types of credit responsibly. However, don't take on debt you don't need just to improve your credit mix.
Become an authorized user
Being added as an authorized user on someone else's credit card account can help improve your credit score, especially if you have a thin credit file or are rebuilding credit. You'll benefit from the primary account holder's positive payment history, as long as they pay their bills on time and maintain low balances.
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The bottom line
nderstanding and improving your credit score is an essential aspect of managing your financial health. While myths about credit scores abound, the truths reveal a clear path to maintaining and enhancing your creditworthiness. By debunking common misconceptions, you're better equipped to make informed decisions that positively impact your credit score.
Adopting practices such as paying bills on time, managing credit card balances, and maintaining a healthy mix of credit can gradually improve your score, offering significant long-term benefits. These include easier access to credit, lower interest rates, and greater financial flexibility. It's important to remember that improving your credit score is a marathon, not a sprint. It requires patience, discipline, and consistent effort over time.
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Director of Content
Lissa Poirot is Joy Wallet’s Head of Content and an award-winning journalist and editor with a focus on finance, travel and health. Her work has appeared online and in print, and she has often been cited as a source on both. She currently resides in Pennsylvania.
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