Debunking Important Credit Myths. Credit is an essential aspect of modern life, as it allows individuals to make purchases and invest in things that they might not have been able to afford otherwise.
However, there are many myths and misconceptions surrounding credit that can lead to confusion and even harm to credit scores.
Debunking Important Credit Myths
In this article, we’ll be debunking some of the most common and important credit myths to help you better understand how credit works and how to make the most of it.
What are Credit Card Myths?
Before we get into the specific credit myths, let’s talk about credit card myths. Many people believe that credit cards are inherently bad for your credit score and should be avoided at all costs. However, this is simply not true. While it’s true that carrying a high balance on your credit card can negatively impact your credit utilization rate, credit cards can actually help improve your credit score if used responsibly.
One common credit card myth is that you should avoid getting a credit card altogether to protect your credit score. However, having a credit card and using it responsibly can actually help build your credit history and improve your credit score over time.
Now that we’ve established some of the common credit card myths, let’s take a closer look at specific credit myths and debunk them one by one.
Myth #1: Checking Your Credit Score Will Lower It
This is one of the most pervasive credit myths out there, and it’s simply not true. Checking your credit score will not lower it. In fact, checking your credit score regularly is an important part of maintaining good credit. It allows you to keep an eye on any changes to your credit score and address any errors or inaccuracies in your credit report.
It’s important to note that there are two types of credit inquiries: hard inquiries and soft inquiries. Hard inquiries are when a lender checks your credit report when you apply for credit, such as a loan or credit card. These types of inquiries can have a temporary negative impact on your credit score. Soft inquiries, on the other hand, are when you check your own credit score or when a lender checks your credit report for a pre-qualification offer. These types of inquiries do not impact your credit score.
Myth #2: Closing Credit Cards will improve your Credit Score
Another common credit myth is that closing credit cards will improve your credit score. However, this is not the case. In fact, closing credit cards can actually harm your credit score in two ways.
First, closing a credit card will decrease your available credit, which can increase your credit utilization rate. Your credit utilization rate is the amount of credit you’re using compared to the amount of credit you have available. A high credit utilization rate can negatively impact your credit score.
Second, closing a credit card will also decrease the average age of your credit accounts, which can also harm your credit score. Your credit age is an important factor in your credit score, and having older accounts can positively impact your score.
Myth #3: You Need to Carry a Balance on Your Credit Card to Improve Your Credit Score
Many people believe that carrying a balance on their credit card is necessary to improve their credit score. However, this is simply not true. In fact, carrying a balance on your credit card can actually harm your credit score by increasing your credit utilization rate and potentially leading to interest charges.
The best way to improve your credit score is to pay your credit card balances in full and on time each month. This demonstrates responsible credit use and can help build your credit history over time.
Myth #4: Credit Counseling Will Hurt Your Credit Score
Credit counseling can be a helpful resource if you’re struggling with debt. However, some people avoid credit counseling because they believe it will harm their credit score. This is not true. Credit counseling can actually help improve your credit score in the long run.
Credit counseling involves working with a professional to develop a debt repayment plan and manage your finances. While enrolling in a debt management plan (DMP) may have a temporary negative impact on your credit score, completing the plan can actually improve your score by demonstrating responsible credit management and reducing your overall debt.
It’s important to note that enrolling in a DMP may be noted on your credit report, but it does not carry the same negative impact as bankruptcy or a debt settlement program.
Myth #5: You Only Have One Credit Score
Many people believe that they only have one credit score, but this is not the case. In fact, you have multiple credit scores from different credit bureaus and scoring models.
The three major credit bureaus in the United States are Equifax, Experian, and TransUnion. Each bureau collects information from different sources and may have slightly different information on your credit report. Additionally, there are different scoring models that each bureau may use to calculate your credit score.
It’s important to regularly check all of your credit reports and scores to ensure that the information is accurate and to get a full picture of your credit health.
Understanding credit myths and misconceptions is an important part of managing your credit and maintaining a healthy credit score. By debunking these common credit myths, you can make informed decisions about your credit and avoid making mistakes that can harm your score.
Remember, checking your credit score will not lower it; closing credit cards can harm your score; carrying a balance on your credit card is not necessary to improve your score; credit counseling can actually help your score; and you have multiple credit scores to consider.
By keeping these facts in mind and practicing responsible credit management, you can build and maintain a strong credit history for years to come.
Can I improve my credit score quickly?
Improving your credit score quickly is not a guarantee. Many factors contribute to your score, and it typically takes consistent, responsible credit management over time. Strategies that may help include paying your bills on time, keeping your credit utilization low, and regularly checking your credit reports for errors.
Should I close old credit cards to improve my score?
Closing old credit cards can harm your score by reducing your available credit and shortening your credit history. If you have a card you no longer use or that has high fees, consider keeping it open but using it sparingly to maintain your credit history and available credit.