Debunking Common Myths About Credit Scores
It's no secret that having a good credit score is important when it comes to things like buying a house or car, getting a loan, or even applying for a job. But despite its significance, there are still many misconceptions and beliefs about credit scores that could hurt your finances. Let's debunk some of the most common myths:
Myth #1: Checking Your Credit Score Lowers It
This is one of the biggest myths about credit scores. Checking your own credit score (known as a soft inquiry) won't affect it at all. In fact, checking it regularly is a good habit to develop as it can help you catch any errors or potential identity theft early on.
On the other hand, when someone else checks your credit score (known as a hard inquiry), it can slightly lower it. However, the impact is typically small and temporary. Multiple hard inquiries within a short period of time could have a more significant effect, though, so be mindful of how often you apply for credit.
Myth #2: Closing Credit Cards Boosts Your Score
This myth probably stems from the belief that having fewer open credit accounts is better for your credit score. However, cancelling a credit card could actually harm your score in two ways:
- It reduces the amount of available credit you have, which could increase your credit utilization ratio (the amount you owe compared to the amount of credit you have available). A higher ratio can hurt your score.
- It shortens the length of your credit history, which is a factor in calculating your score. The longer your credit history, the better, so closing a credit card account that you've had for a long time could lower your score.
If you want to stop using a credit card, it's better to simply stop using it rather than cancelling it altogether. Just make sure to keep the account open and periodically charge a small amount to prevent it from being closed due to inactivity.
Myth #3: Carrying A Balance Increases Your Score
While it's true that having a low credit utilization ratio (ideally, below 30%) can help your credit score, carrying a balance is not necessary to achieve this. In fact, carrying a balance could cost you unnecessary interest charges.
The best way to maintain a low utilization ratio is to pay your balance in full and on time each month. This shows lenders that you're responsible with credit and can handle your debt effectively.
Myth #4: You Only Have One Credit Score
Many people think that there is one universal credit score that all lenders use, but that's not the case. There are actually multiple credit scoring models, each with its own algorithm and range of scores.
The most commonly used credit scores are FICO scores, which range from 300 to 850. However, even within the FICO system, there are many different versions and variations (such as the FICO Auto Score, FICO Bankcard Score, etc.) that lenders may use depending on the type of credit they're evaluating.
It's also worth noting that different credit bureaus may have slightly different information on your credit report, which can affect your score. That's why it's important to check your credit report regularly from all three bureaus (Equifax, Experian, and TransUnion) and not just rely on one score.
Myth #5: Paying Off Collections Erases Them From Your Credit Report
If you've had trouble with debt in the past, you may have some collections accounts on your credit report. These can negatively impact your score, and many people assume that paying them off will erase them from their report.
Unfortunately, paying off a collection account won't automatically remove it from your report. It will still show up as a negative item, but with a zero balance. However, over time, the impact of the collections account will lessen as it ages and you demonstrate responsible credit behavior.
Overall, understanding how credit scores work and avoiding these common myths can help you maintain a healthy credit score and make informed financial decisions.