Everyone knows credit scores are an important factor when it comes to qualifying for the best loans or being approved for the rewards card you’ve been eyeing. While most people know how important their credit score is, many don’t really understand how it works and what can hurt your score.
To help put your mind at ease, we’ll explain the truth behind the five most common credit score myths and what you can do to raise your score.
1. You Can Damage Your Credit Score by Checking It
Many people believe that checking your credit score can negatively impact it. This myth stems from confusion between ‘hard’ and ‘soft’ inquiries.
When you check your credit score yourself, it’s considered a ‘soft inquiry’. Soft inquiries have no impact on your credit score.
It’s the ‘hard inquiries’, typically made by lenders when you apply for a loan or credit card, that can slightly lower your score temporarily. A lot of banks and credit card issuers will let you see your score once a month for free!
2. Carrying a Balance Boosts Your Score
There’s a common belief that maintaining a balance on your credit cards helps build your credit score. The reality is carrying a balance doesn’t improve your score.
In fact, it can have the opposite effect. A high balance means you’re using more of your available credit and so have a high credit utilization ratio, a key factor in credit scoring. You want to have a low credit utilization ratio, ideally below 30%.
Paying off balances in full each month is a better strategy. Plus you’ll save money on interest.
3. If Your Spouse Has Bad Credit, Yours Will Suffer
Many people worry that marrying someone with a poor credit history will drag their score down. Luckily this isn’t true.
Your credit score is your own. Marrying someone with a bad credit score won’t affect your credit. However, joint accounts or co-signing loans like a mortgage with your spouse will tie your credit histories together and these loans can affect your score.
4. Closing an Unused Credit Card Improves Your Score
It’s often thought that closing credit card accounts you no longer use will positively impact your credit score. It can feel good to be done with an old account and simply shut it down, but don’t.
Closing an account can actually hurt your score because it reduces your total available credit and so increases your credit utilization ratio. It also lowers the total age of your credit accounts. A longer credit history means a higher score.
It’s often better to keep older accounts open.
5. The Less You Use Credit, the Higher Your Score
Some believe that avoiding the use of credit altogether will lead to a high credit score. The trouble with that is credit scores are based on your history of managing credit. If you don’t use credit, there’s no data to base your score on.
Responsible credit usage, such as regular payments and maintaining low balances, shows lenders that you can manage credit effectively and will increase your score.
Credit can be confusing – there’s lots of misinformation out there – but it doesn’t have to be.
- Pay your balances off in full and on time.
- Only use 30% of your credit limit.
- Don’t close old accounts and you should see your score rise.
Lastly, remember you have to use credit to get credit. The important thing is to be responsible and if you feel like you need a little more help managing, ask. There’s plenty of advice out there.