There are many myths and misconceptions about credit and credit scores that can lead to confusion and misunderstanding. In this article, we will debunk some common credit myths and clarify the truth behind them to help you better understand credit and improve your credit score.
Myth #1: Checking your credit score will lower it
Fact: Checking your own credit score, also known as a “soft inquiry,” will not lower your credit score. Soft inquiries do not impact your credit score and are only visible to you.
On the other hand, “hard inquiries,” which occur when you apply for credit, can temporarily lower your credit score. However, the impact of hard inquiries on your credit score is usually minimal and will likely only be a temporary drop.
Myth #2: Closing credit accounts will improve your credit score
Fact: Closing credit accounts may seem like a good way to improve your credit utilization ratio (the amount of credit you use compared to the total amount of credit available to you), but it can actually have the opposite effect.
Closing old credit accounts can shorten your credit history, which can lower your credit score. It is generally better to keep old credit accounts open and active, as long as you are not using them and are able to pay off your balances in full each month.
Myth #3: Carrying a balance from month to month is good for your credit score
Fact: Carrying a balance from month to month is not good for your credit score. While it is important to use credit responsibly and make timely payments, it is generally best to pay off your credit card balances in full each month.
Carrying a balance from month to month will result in paying interest charges, which can add up over time. This can also increase your credit utilization ratio, which can hurt your credit score.
Myth #4: You only need to worry about your credit score if you plan to take out a loan
Fact: Your credit score is not just important for taking out loans. It can also affect other aspects of your financial life, such as your ability to rent an apartment, get approved for a credit card, or even qualify for certain jobs.
Myth #5: Paying off your credit card in full each month means you won’t have a credit score
Fact: Paying off your credit card in full each month is actually a good thing for your credit score. It demonstrates financial responsibility and the ability to manage your credit effectively.
Your credit score is based on several factors, including your payment history, credit utilization ratio, credit history, and the types of credit you have used. As long as you are using credit responsibly and making timely payments, you will have a credit score.
Myth #6: Credit scores are the same as credit reports
Fact: Credit scores and credit reports are not the same thing. A credit report is a detailed record of your credit history, including information about your credit accounts, payment history, and any negative marks such as late payments or bankruptcies.
A credit score, on the other hand, is a numerical summary of your creditworthiness based on the information in your credit report. Credit scores are used by lenders to determine your eligibility for credit and loans.
Myth #7: You can only have one credit score
Fact: There are actually multiple credit scores, as different credit scoring models may produce different scores based on the same credit report. Some of the most well-known credit scoring models include FICO and VantageScore.
Each credit scoring model has its own set of criteria and algorithms, so it is possible for your credit score to vary depending on which model is used. It is important to keep track of your credit scores from all three major credit bureaus (Equifax, Experian, and TransUnion) to get a more accurate picture of your creditworthiness.
Myth #8: Credit repair companies can guarantee to improve your credit score
Fact: Credit repair companies cannot guarantee to improve your credit score. While they may claim to be able to remove negative information from your credit report or dispute errors, only time and responsible credit management can improve your credit score.
It is important to be wary of credit repair companies that make unrealistic promises or charge high fees. Instead, you can work on improving your credit score by paying your bills on time, keeping your credit utilization low, and disputing errors on your credit report.
Conclusion
Understanding the truth behind credit myths can help you make informed decisions about your credit and improve your credit score. Remember, checking your own credit score will not lower it, carrying a balance from month to month is not good for your credit score, and credit repair companies cannot guarantee to improve your credit score. By separating fact from fiction, you can better manage your credit and achieve your financial goals.