Don't Fall for These Credit Myths: Debunking the Falsehoods
April 6, 2023
5 min read
Credit myths can prevent people from making informed decisions about their financial health, leading to poor credit scores, limited access to loans, and higher interest rates.
Don't Fall for These Credit Myths: Debunking the Falsehoods
Debunking credit myths is crucial to improving financial literacy and promoting responsible credit behavior. By understanding the truth about credit, people can make informed decisions about their finances, improve their credit scores, and access better loan terms and interest rates.
Therefore, educating yourself and others about common credit myths is essential to ensure everyone can make informed decisions about their financial health.
Myth 1: Checking Your Credit Report Lowers Your Credit Score
The common credit myth is that checking your credit report can lower your credit score. However, this is not true. When you check your credit report, it is considered a soft inquiry and does not affect your credit score.
Regularly monitoring your credit report can help you identify errors or fraudulent activity and take steps to correct it. A hard inquiry, when a lender or creditor checks your credit report when you apply for credit, can temporarily lower your credit score. But the impact is usually small and fades away over time.
Myth 2: Carrying a Balance on Your Credit Card Improves Your Credit Score
Many people believe that carrying a balance on their credit card will improve their credit score, but this is a typical credit myth. In reality, maintaining a balance can harm your credit score because it increases your credit utilization rate, which is the amount of credit you’re using compared to the total amount of credit available.
Credit utilization rate is a significant factor that impacts your credit score. Generally, it’s recommended to keep your credit utilization rate below 30% to maintain a good credit score. So, if you carry a balance, you’re likely to have a higher credit utilization rate, which could lower your credit score.
Paying your credit card balance monthly is essential to avoid interest charges and maintain a reasonable credit utilization rate. In addition, this will help you build a positive credit history and improve your credit score.
Myth 3: Closing Old Credit Card Accounts Boosts Your Credit Score
When you close an old credit card account, you reduce your available credit, which can increase your credit utilization ratio. This ratio is the amount of credit you have used compared to the total amount of credit available. A higher credit utilization ratio can lower your credit score.
Additionally, closing an old credit card account can shorten your credit history, another factor that impacts your credit score. So, keeping old credit card accounts open is essential, even if you use them sparingly.
Myth 4: Income Affects Your Credit Score
There is a common misconception that your income level affects your credit score. However, this is not true. Your credit score is determined by your credit history, including your payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries.
While your income level is essential when managing your finances and paying off debt, it does not directly impact your credit score. This is because credit bureaus don't even factor in your income when calculating your credit score.
Myth 5: All Debt Is Bad for Your Credit Score
Contrary to popular belief, only some debt suits your credit score. However, some types of debt can help boost your credit score if appropriately managed. For example, taking out a small loan and paying it back on time can demonstrate to lenders that you are a responsible borrower and can be trusted with more significant sums of money.
Additionally, having a mix of different types of credit, such as credit cards and installment loans, can show that you can handle other forms of debt. However, it is essential to remember that carrying high debt and missing payments can negatively impact your credit score.
Myth 6: You Only Have One Credit Score
Credit bureaus, lenders, and other financial institutions use several credit scoring models. The FICO score is the most commonly used scoring model, which ranges from 300 to 850. However, different scoring models, such as the Vantage Score, also vary from 501 to 990.
Each scoring model has its unique algorithm and weighting system, which can result in different credit scores for the same individual. Additionally, other lenders may use different scoring models or may place more emphasis on certain factors, such as payment history or credit utilization.
Myth 7: Co-Signing a Loan Doesn't Affect Your Credit Score
Co-signing a loan is common, but many people believe their credit score will remain the same. Unfortunately, this is a myth that can be dangerous to consider. When you co-sign a loan, you essentially agree to take responsibility if the borrower can't repay it.
This means the loan will show up on your credit report and affect your credit score as if it were your loan. If the borrower defaults on the loan, you'll be responsible for paying it back, which could lead to missed payments and a lower credit score.
Myth 8: Credit Repair Companies Can Remove Negative Information from Your Credit Report
Credit repair companies often claim to be able to remove negative information from your credit report, but this is a common credit myth. The truth is that no company or individual can remove accurate negative information from your credit report.
Credit reporting agencies, such as Experian, Equifax, and TransUnion, are legally required to report accurate information about your credit history. Therefore, if your report has an error, you can dispute it and have it corrected. However, if the damaging information is accurate, it will remain on your account for a certain period, usually seven years.
Being wary of credit repair companies that make unrealistic promises and charge high fees is essential. Instead, focus on improving your credit score through responsible credit behavior, such as paying your bills on time, keeping your credit utilization low, and monitoring your credit report for errors.
