We all know a good credit score is crucial these days. That three-digit number can determine your interest rates and whether you qualify for a mortgage, auto loan, or credit card.
But let’s be honest, there’s a lot of misinformation floating around. We’ll take you through some of the most common credit myths out there and tell you which are true or false.
Myth: Checking your credit score lowers it
Why it’s false: Checking your credit score does not impact your credit.
It’s a good idea to check your credit report regularly. This keeps you informed about your creditworthiness (especially if you plan to make a large purchase like a car or house in the future), can help you make financial decisions, and lets you identify and resolve any errors or signs of fraud.
This type of credit score check is considered a “soft pull” and does not affect your score. Conversely, actions like applying for a credit card, known as “hard pulls,” can temporarily lower your credit score.
Myth: Carrying a balance on your credit card boosts your credit score
Why it’s false: Carrying a balance on your credit card doesn’t help your credit score; it can hurt it. Credit utilization, the ratio of your total credit card balances to your total credit limits, is a major factor in determining your credit score.
The higher the balance on your card, the higher your utilization rate is, which can lower your score. Also, carrying a balance means paying interest on your purchases, which increases your overall debt. Whatever balance you charge on your credit card, pay it in full at the end of the month.
If you have a high balance you’re having trouble paying, consider transferring it to a balance transfer credit card. They often offer 0% APR introductory rates, which may help you catch up on payments. However, transfer fees apply, and you’ll want to create a repayment plan to avoid accruing interest after the introductory period ends.
Myth: Your income impacts your credit score
Why it’s false: Credit scores are based on five factors: payment history, credit utilization, average credit age, the different types of credit a person has, and how many recent credit inquiries they’ve made.
Note that income and net worth are not part of the calculation. A high credit score does not necessarily indicate wealth – and a low score does not imply poverty.
Myth: Your credit score will drop if you get credit counseling
Why it’s false: Credit counseling itself will not negatively impact your credit score. So, if you’re seeking help, don’t be deterred. Credit counseling can be a valuable tool for improving your financial health.
Credit counselors can provide valuable guidance on managing debt, such as creating a budget, negotiating lower interest rates with creditors, and developing a debt management plan.
These strategies can lead to reduced debt, improved payment history, and lower credit utilization, all of which can improve your credit score. Some debt relief options they might recommend, like debt settlement or bankruptcy, will have a negative impact on your score. If you choose those options, it’s likely because it’s a necessary step towards long-term financial stability.
Myth: Declaring bankruptcy will ruin your credit forever
Why it’s false: Declaring bankruptcy will significantly impact your credit score but won’t permanently damage your credit.
While bankruptcy has a severe and immediate negative impact, it won’t remain on your credit report forever. Chapter 7 bankruptcy stays on your credit for 10 years from the filing date, and Chapter 13 for 7 years.
After bankruptcy, you can rebuild your credit by establishing new credit, making consistent on-time payments, and keeping your credit utilization low.
Myth: You should strive for a perfect credit score
Why it’s false: While you’d certainly be entitled to bragging rights for having a perfect 850 credit score, there are no exclusive benefits reserved for those in this elite range.
You get most of the significant credit score benefits when entering the “excellent” credit range (typically 740 and above). This includes access to the lowest interest rates on mortgages, auto loans, and credit cards. So go ahead and brag if your score hits 740, you deserve it.
Myth: You have an overall credit score
Why it’s false: Lenders and credit bureaus use several different credit scoring models.
- FICO: This is one of the most widely used scoring models most lenders employ in credit decisions.
- VantageScore 3.0: Developed by the three major credit bureaus (Equifax, Experian, and TransUnion), VantageScore is another popular scoring model.
These models use slightly different formulas and weigh factors like payment history, credit utilization, and credit age differently. Depending on the model used, this can result in variations in your credit score.
Myth: Your employer can see your credit score
Why it’s false: Employers and potential employers cannot see your credit score directly. During the hiring process, employers can request and access a version of your credit report as part of a background check. However, this report does not typically include your actual credit score, and you must provide your written consent before they can legally obtain any part of your credit report.
Employers primarily use credit checks to assess your financial responsibility and identify any potential risks. They may review information such as your payment history, debt levels, and any history of bankruptcies or judgments.
The Fair Credit Reporting Act (FCRA) regulates the use of consumer reports by employers and other entities. It outlines the permissible purposes for obtaining a credit report and protects consumers from unauthorized access to credit information.
There is no such thing as a “credit blacklist”
True: Credit bureaus compile and maintain information about your credit history, such as your accounts, inquiries, and past bankruptcies.
They don’t determine your creditworthiness. That decision lies with lenders and creditors who use the information in your credit report and their own criteria to assess your application. If you’ve been denied credit by multiple lenders, it doesn’t mean you’re on a “blacklist.”
It may, however, mean that recurring factors in your credit history contribute to these decisions.
Some debt can be good
True: Responsible borrowing lets you achieve significant life milestones like purchasing a home, funding a college education, or acquiring a necessary vehicle. These investments can enhance your quality of life and even appreciate value over time.
Making loan or credit card payments demonstrates financial responsibility and helps build a positive credit history. This, in turn, can raise your credit score.
Closing credit cards will hurt your credit score
True: Closing a credit card can negatively impact your credit score.
Credit scores are significantly influenced by credit utilization, the percentage of your available credit that you’re currently using.
Closing a card while carrying balances on other accounts can increase your overall credit utilization, as it reduces your total available credit. This can lower your score, as high utilization (typically exceeding 30%) has a substantial negative impact. Plus, if you close a card you’ve had for a long time, it reduces the age of your credit card, which can further lower your score.
Does this mean you should never close a credit card? No! Closing a card might be beneficial in certain situations, such as having a card with high annual fees that you rarely use or if a card tempts you to overspend. Before closing any card, carefully weigh the potential impact on your credit score.
Keep building your credit
Understanding how to build credit and how credit scoring actually works is vital for making informed financial decisions. By debunking these common myths, you can take control of your credit health and build a strong financial future.
Building good credit takes time and consistent effort, but the rewards – from lower interest rates to easier loan approvals – make it worthwhile. So, educate yourself, monitor your credit reports regularly, and make responsible financial choices. Your future self will thank you.
