Your credit score is a vital number that can significantly impact your financial life. It affects your ability to secure loans, credit cards, mortgages, and even influences the interest rates you’re offered. Unfortunately, there are numerous myths and misconceptions surrounding credit scores. In this blog, we’ll debunk some common credit score myths and provide you with the information you need to navigate the world of credit responsibly.
Myth 1: Checking Your Credit Score Harms Your Credit
One of the most persistent myths is that checking your own credit score can hurt your credit. In reality, when you check your credit score, it’s considered a “soft inquiry” or a “self-inquiry,” which has no impact on your credit score. Lenders, on the other hand, perform “hard inquiries” when reviewing your credit for lending purposes, and these inquiries can affect your score, but usually only by a few points.
Myth 2: Closing Old Credit Accounts Will Improve Your Score
Some people believe that closing old or unused credit accounts will boost their credit score. In most cases, this is untrue. Closing old accounts can actually have a negative effect on your credit score, as it reduces the average age of your credit history. A longer credit history is generally seen as more positive, so it’s often beneficial to keep old accounts open, even if you don’t use them regularly.
Myth 3: Carrying a Balance on Your Credit Card Boosts Your Score
It’s a common myth that carrying a balance on your credit card can help your credit score. In reality, you don’t need to carry a balance to build credit. You can pay off your credit card balance in full each month, and it will have the same positive effect on your credit as long as you make on-time payments. Carrying a balance will likely lead to interest charges and may not have any positive impact on your credit score.
Myth 4: Closing Negative Accounts Removes Them from Your Credit Report
Closing a credit account with a negative history, such as a late payment or default, doesn’t make that history disappear. Negative information can remain on your credit report for up to seven years. The best approach is to work on repairing your credit by making timely payments and demonstrating responsible credit behavior over time.
Myth 5: Your Income Affects Your Credit Score
Your income does not play a direct role in determining your credit score. Credit scores are based on your credit history, payment history, credit utilization, and other financial factors. Lenders may consider your income when assessing your ability to repay a loan, but it doesn’t factor into your credit score.
Myth 6: Closing Credit Cards with High Limits Improves Your Score
Closing credit cards with high credit limits may actually harm your credit score by increasing your credit utilization ratio. Your credit utilization ratio is the amount of credit you’re using compared to your total available credit. A higher credit limit can help lower this ratio, potentially improving your score.
Understanding the truth about credit scores is crucial for making informed financial decisions. By dispelling these common credit score myths, you can take proactive steps to maintain and improve your creditworthiness. Keep in mind that responsible credit management, including making on-time payments, keeping credit utilization low, and not closing old accounts, are key factors in maintaining a healthy credit score. Stay informed and make decisions that align with the facts to ensure a strong financial foundation.