Common Credit Myths Debunked

Understanding how credit works is crucial for building a strong financial future. However, many people fall prey to common myths that can hinder their progress. Here are some prevalent credit myths, and the truth behind them:

Myth 1: Closing Old Credit Cards Boosts Your Score

Truth: This is one of the most damaging myths. Closing an old credit card can actually hurt your credit score, especially if it's an account with a long history and a high credit limit.

• Impact on Credit History Length: A longer credit history generally leads to a higher score. Closing an old account shortens your average credit age.
• Impact on Credit Utilization: Closing a card reduces your total available credit. If you carry balances on other cards, your credit utilization ratio (the amount of credit you're using versus your total available credit) will increase, which can negatively impact your score.

Better Strategy: Keep old accounts open, even if you don't use them regularly. If you must close one, choose a newer card with a lower limit.

Myth 2: Checking Your Own Credit Score Harms It

Truth: This is false. Checking your own credit score or report results in a "soft inquiry," which does not affect your credit score. Hard inquiries, which occur when a lender checks your credit because you've applied for new credit (like a loan or credit card), can temporarily lower your score by a few points.

Better Strategy: Regularly check your credit report from all three major bureaus (Equifax, Experian, and TransUnion) for errors and to monitor your progress. You can get a free report annually from annualcreditreport.com.

Myth 3: Carrying a Balance on Your Credit Card Helps Your Score

Truth: This is a costly myth. Carrying a balance on your credit card does not help your credit score; it only costs you money in interest. While having an active credit account is good, you don't need to carry a balance to demonstrate responsible usage.

Better Strategy: Pay your credit card balance in full every month. If you can't, pay as much as you can to keep your credit utilization low (ideally below 30%).

Myth 4: You Only Have One Credit Score

Truth: You actually have many credit scores. While FICO and VantageScore are the two main scoring models, each credit bureau (Equifax, Experian, TransUnion) may have slightly different data, leading to variations in your score. Lenders also use different versions of these scoring models depending on the type of credit you're applying for.

Better Strategy: Focus on the underlying factors that influence all your scores: payment history, credit utilization, length of credit history, new credit, and credit mix.

Myth 5: Paying Off a Collection Account Removes It From Your Report

Truth: While paying off a collection account is a good step, it typically doesn't disappear from your credit report immediately. Paid collections will still show on your report for up to seven years from the original delinquency date. However, a "paid" collection looks much better to lenders than an "unpaid" one.

Better Strategy: If you have a collection, try to negotiate a "pay for delete" agreement, where the collection agency agrees to remove the entry from your credit report in exchange for payment. Get this agreement in writing before making any payments.

Conclusion

Separating credit fact from fiction is essential for making informed financial decisions. By understanding the truth behind these common credit myths, you can avoid costly mistakes and work more effectively towards a healthier credit score.