Credit scores remain an enigmatic topic for many, overshadowed by numerous myths and misconceptions. These myths can distort our understanding of how credit scores work and influence our financial choices. In this article, we debunk some of the most common myths surrounding credit scores, providing clarity and helping consumers make informed financial decisions.
Myth 1: Checking your own credit hurts your credit score
This is one of the most persistent misconceptions. Querying your own credit report doesn’t reduce your credit score. It’s seen as a soft inquiry, unlike hard inquiries, which occur when lenders check your credit during the loan or credit card application process. Therefore, reviewing your credit report frequently is recommended to ensure its accuracy and monitor for potential identity theft without worrying about affecting your score.
Myth 2: Having no credit history is better than having a poor credit history
Possessing a credit history is crucial for lenders when they are assessing your creditworthiness. Without a credit history, it can be tough for you to get approved for loans or credit cards, or if you can, the interest rates might be higher. A poor credit history, however, can be rebuilt over time with responsible credit usage, demonstrating creditworthiness and improving your credit score.
Myth 3: Carrying a balance on your credit cards helps your credit score
This myth suggests that owing money on your credit cards improves your credit score. This isn’t accurate. Paying off your full credit card balance each cycle is advisable, as it helps avoid interest and shows lenders that you are capable of managing your credit responsibly. Accumulating debt unnecessarily to keep a balance could negatively impact your finances without providing any advantages to your credit score.
Myth 4: Closing an unused credit card will increase your credit score
Closing an unused credit card might seem advantageous, but it can also affect your credit score. The history and age of your credit accounts, along with your utilization rate, impact your credit score. Closing a card lowers your overall credit limit, potentially raising your utilization rate and affecting the average age of your credit accounts, subsequently lowering your score.
Myth 5: Paying off a collection account will remove it from your credit report
Paying off a collection account won’t erase it from your credit report. Some consumers think settling a debt will clear their credit report, but it stays on your report for up to seven years from the initial delinquency date, affecting your credit score.
In conclusion, misunderstandings about credit scores can lead to ill-informed financial decisions. Educating yourself about credit scoring myths will enable you to make prudent financial decisions beneficial to your credit score. Responsible actions like paying bills on time, keeping credit utilization low, and frequently reviewing your credit report are the secrets to building a robust credit profile, not the myths and misconceptions.
