Key takeaways
- Understanding common credit score myths can help you avoid pitfalls and improve your financial health.
- Actions like applying for new cards or closing old accounts may harm your score if not approached strategically.
- Regularly checking your score and practicing good financial habits are essential.
Your credit score matters. A high score will get you the best rates on loans, credit cards, and even that apartment you’ve been eyeing. While most people know how important a high score is, many aren’t sure how to get one. Credit score myths are still prevalent and can hold you back.
We’re here to debunk some common misconceptions about credit. Find out what makes that three-digit number go up or down, and see if you’re falling for any credit myths.
Jump to:
- Checking your credit score lowers it
- You should carry a balance
- Never close credit card accounts
- Having a lot of credit cards does damage
- Your spouse’s score affects yours
- Paying off debt helps your credit
- Late payments on utility bills always count
- A higher income means a higher score
- Applying for a new account will hurt your credit
- A credit freeze with one bureau applies to all three
- Bottom line
Checking your credit score lowers it
Many people have heard that checking their scores will lower them. Thankfully, this is not true. Checking your score and knowing where you stand is a good idea.
When you check your credit score, it’s called a soft inquiry or soft pull. A soft inquiry does not appear on your credit report and so will not affect your score.
This differs from a hard inquiry. A hard inquiry or pull occurs when a lender checks your score to approve a credit application. A hard inquiry is noted on your credit report and will drop your score by five to ten points. Each hard inquiry says on your report for one to two years, but it shouldn’t affect your score after the first year.
You can check your score for free with most card issuers and the three major credit bureaus – Equifax, Experian, and TransUnion. You can review your credit report for free once a year via annualcreditreport.com. It’s good to keep tabs on both to know where you stand.
You should carry a balance
Carrying a balance is one of the worst things you can do for your score and pocketbook.
When you carry a balance, you pay interest on the amount carried. It can get very expensive since credit cards have high interest rates.
Carrying a balance from month to month also increases your credit utilization ratio – how much of your credit limit you use at a given time. Your utilization rate makes up 30% of your FICO score. It is the second biggest scoring factor.
Financial experts recommend keeping your utilization under 30%. A low utilization is hard to achieve when you carry a balance.
The best thing you can do is pay your entire balance in full every month. You’ll avoid interest charges and have a lower usage rate. Some people find it easier to make multiple monthly payments. That way, you won’t have a huge bill to pay at once. Do what works for you, but try not to carry anything from month to month.
Too many negative marks dragging you down?
Never close credit card accounts
Financial writers often advise consumers never to close credit accounts because doing so will hurt their scores. The truth is more complicated than that.
When you close a credit card, it will shorten the length of your credit history. Your credit history is how long you’ve had cards and loans. It makes up 15% of your FICO score. Lenders prefer consumers with long histories since it gives them more data to evaluate you.
If the card in question is an old account, closing it will have a more significant effect on your score. Try to keep it open and active. Put a small recurring charge on the card and set up autopay. If it’s a young account, closing it won’t do much damage. Also, your account will remain part of your credit profile for up to 10 years after you close it.
Closing a card also affects your credit utilization ratio. Credit scoring models consider both the individual card’s utilization rate and the cumulative utilization rate across all accounts. When you close a card, you lose that limit, which can cause your cumulative utilization rate to go up.
That isn’t to say you shouldn’t close an account, but you must consider your utilization. You may need to spend a little less on your other cards to keep a low usage rate.
The long and short of it is that if your account is young, go ahead and close it. It will not have much impact on your score. If your account has high annual fees, close or downgrade it to a card without fees. You may take a hit to your score, but you’ll save money in the long run. If it’s your oldest account, try to keep it open. Closing it can negatively impact your score.
Having a lot of credit cards does damage
Having a lot of cards can improve your score – if used responsibly.
Credit bureaus prefer it when consumers have five or more accounts. The more accounts you have, the more data lenders can evaluate you by. When you have four or fewer accounts, your file is considered thin. Having a thin file can hurt your score.
When you have multiple cards, you will have a higher cumulative credit limit and an easier time maintaining a low utilization ratio. Over time, the length of your credit history will improve. The longer you had accounts, the better your score.
The key is to manage all your accounts well. Do not carry a balance, and always pay your bills on time. Your payment history makes up 35% of your FICO score. If you do these two things, the cards will add positive information to your report, and you’ll benefit.
New
If you find it hard to manage multiple accounts and start missing payments, your score will suffer. Only open as many cards as you can manage responsibly.
Late payments on utility bills always count
Utility bill payments are another tricky one. Only some utility companies report both timely and late payments to the credit bureaus. If your company does, on-time payments will help your score, while paying late will hurt it.
Many utility companies do not report payments, including late payments. In this case, late payments will only end up on your report if they are VERY LATE and sent to collections – over six months late. Having an account in collections will stay on your report for up to seven years and can do significant damage. The best thing you can do is pay it off as soon as possible.
If you consistently pay your bills on time and want to boost your score, you can work with a bill or rent reporting company. These companies report on-time rent, utility, subscription, and phone bill payments. You raise your rating monthly bills you’re already paying on time. Most of these companies will charge a fee for their services, but a few are free.
Your spouse’s score affects yours
Getting married does not impact your score. The credit bureaus maintain separate scores for each person.
Your spouse can affect your score if you co-sign a loan, take out a mortgage, or open joint credit accounts. In this case, both of you are responsible for the debt. Late payments and high utilization rates will hurt both people’s scores.
Paying off debt helps your credit
Paying off debt is a tricky one. Paying off credit card debt will indeed improve your score. When you pay off credit card debt, you improve your utilization ratio: a lower ratio means a higher score.
The same isn’t true when it comes to loans. It’s always a good idea to pay off your loans. You will save money on interest and be out of debt. That said, how much you owe in loans does not influence your utilization ratio and so will not affect your score.
When you pay off a loan, it can actually cause your score to drop. That is because lenders like it when you have a mix of accounts – both cards and loans. If that was your only loan, your score may dip when it’s no longer part of your credit profile.
Now, this is a minimal credit scoring factor. Credit mix only makes up 10% of your FICO score. It is a much better financial choice to pay off your debts. Keep up good financial habits, and your score will bounce back in no time.
A higher income means a higher score
Your income has nothing to do with your score. In fact, it’s not even included in your credit report. Your income tells financial institutions your capacity to pay bills, not how risky a borrower you are.
While it does not directly affect your score, it’s true that a higher salary makes it easier to pay off credit card balances and manage installment loans. Lenders may also approve a higher credit limit, which will help you keep your utilization low.
No matter your income, do your best to live within your means. Do not rely on borrowing. Treat credit cards as tools that give you rewards and boost your score. Use them like cash or debit and pay your bill in full every month. You’ll save money on interest, and your score will go up.
Use your card to build credit!
Applying for a new account will hurt your credit
This common myth is true. Applying for a new card will hurt your score, but not by much.
When you apply for a new card, the issuer will conduct a hard inquiry. The hard credit check will drop your score by five to ten points. One is not a big deal. Continue making payments on time and maintain a low utilization rate; your score will bounce back in no time.
Applying for a loan is slightly different. Lenders will still conduct hard inquiries, but the bureaus will count all hard inquiries made within 14 days as one. They give consumers this perk since the bureaus know how important it is to shop around for loans.
Another trick you can use to protect your score is prequalifying. Many financial institutions let you prequalify for their products. When you prequalify, they will do a soft inquiry and review your basic financial information to ensure eligibility. Being prequalified means you meet the basic criteria. It is not a guarantee that you’ll be approved when you officially apply.
A credit freeze with one bureau applies to all three
All three credit bureaus allow consumers to lock their credit reports. When you freeze your credit, no one—not even you—can access your reports or open new accounts. This is a great way to prevent fraudulent activity and identity theft.
The catch is that you must put freezes in place with each bureau individually. Only then will you be fully protected from fraud.
Frequently asked questions
1. Why do I have bad credit if I have no debt?
Not having debt does not guarantee a good score. The credit scoring models calculate your score based on credit activity, not just the absence of debt. Lenders want to see you borrow responsibly and pay your bills on time to assess how much of a risk you pose. If you don’t use credit cards or loans, your profile will be thin, leading to a lower score.
2. Is it possible to get an 850 credit score?
Yes, you can get a perfect score, but it is rare. You will need a long credit history, no missed payments, and a utilization ratio under 10%. You do not need a perfect 850 to get the best deals. Lenders give their best rates to applicants with scores of 760 and higher.
3. What are the three most common credit card mistakes?
The three most common mistakes are missing payments, carrying a high balance, and applying for too many cards at once. Always make at least the minimum payment every month. Paying in full is even better as carrying a balance can harm your score. Apply for cards strategically. Wait at least six months between applications. Multiple applications in a short period will make you appear desperate and a high risk.
Bottom line
There are a lot of myths out there regarding your three-digit number. Many credit misconceptions are due to the fact that calculating scores is nuanced. Closing an account may have a negative impact your score, or it may not. The effect depends on how long you’ve had the account. Paying a utility bill late will hurt your score if the company reports it. More often than not, your score will be fine if you pay it before it’s sent to collections. Your marital status will not impact your rating. But if you apply for a mortgage together, then payments on that one account will affect both of your scores.
Get your credit score myths and facts straight. Then, focus on paying your bills on time and keeping your utilization low. Do these two things, and your score will improve over time.
