Credit Score Myths: What Really Impacts Your Financial Health

We are in an age where credit score matters in everything. This ranges from the mortgage rate to your ability to rent an apartment. So, it is important to know what affects those numbers.

Yet, credit myths are still prevalent, which is a shocker for many. Most people act according to these common misconceptions. The average American is likely to lose thousands of dollars due to these misconceptions.

This article differentiates between credit score myths and credit score facts. You’ll be able to differentiate between myth and reality and act accordingly.

Common Credit Score Myths Debunked

Here are five common credit score myths debunked:

Myth 1: Checking Your Own Credit Score Lowers It

The most common myth is that checking one’s own credit score will negatively affect it. In reality, you can check your credit score on your own. It is categorized as a “soft inquiry,” which is not detrimental to the overall score.

It won’t harm you if you’re checking from a legitimate source. For example, the credit bureau themselves. However, you may want to use avenues like a friend working with a lender. This will make it seem like you are applying for credit, and it may bring down your score.

The key difference is between soft and hard inquiries. Hard credit checks happen when a lender pulls your report when you apply for credit or a loan. Only those hurt your score, though they last for a short time.

Myth 2: Carrying a Balance on Credit Cards Helps Your Score

People believe carrying a small balance on credit cards is good for their credit score. These people incur unnecessary interest charges for no reason. So, this is a very costly misconception.

In fact, you will be surprised to learn that having a balance does not improve your score in any manner. What is relevant to credit bureaus is your payment record and credit utilization ratio. If you clear your balance in full, it helps you show responsible use. And you don’t have to pay extra interest.

Myth 3: Closing Old Credit Cards Improves Your Credit

It is a common perception that closing any credit accounts that are no longer in use is wise. However, doing this is detrimental in two ways to your credit score. 

First, closing a credit card limits the credit available to a cardholder. It is likely to have a negative impact on other cards in terms of the credit utilization ratio. The ratio increases if the cardholder carries balances on other cards. 30% of your FICO score is calculated based on utilization rates.

Secondly, there’s a negative impact if the closed card is older than the rest of the accounts. This means that the average credit history age will also reduce. And this is what accounts for 15% of your score. 

Myth 4: Your Income Affects Your Credit Score

It is generally believed that better-paid jobs lead to improved credit scores. This is a major misconception because income is not listed in credit reports at all.

Credit scores indicate how reliable one is in honoring credit commitments. It does not reveal one’s financial capacity. In this case, candidates with modest earnings but good payment habits can get a better rating. Even more than others with high income but poor payment records.

Myth 5: Married Couples Share Credit Scores

The myth that a person’s credit score is tied to that of their spouse is false. This is because there is no such thing as a joint credit score or credit report. Even after getting married, you have two individual reports.

The only case that’s an exception is when you take on joint debts after marriage. For example, when they incur mortgage debts. In such cases, the payment history will affect both their credit scores.

Credit Score Facts: What Actually Impacts Your Credit Score

At this point, you want to know the true credit score facts. Here's what really matters:

1. Payment History (35% of FICO Score)

The scoring system places paying your bills on time at the top. It is the most crucial factor when computing your score. A single instance of late payment can affect your score. And it can remain there for the next seven years. If possible, put automatic payments in place. You can also set up reminders to avoid being in arrears.

2. Credit Utilization (30%)

This shows the proportion of credit you currently use out of what’s available. It is recommended to keep it at least 30% of the credit limit.

For instance, you have five credit cards, and each has a credit limit of $2,000. The total credit limit is $10,000. It is wise to ensure that the balances do not exceed $3,000

3. Length of Credit History (15%)

This shows the length of time you have been using credit. The older the accounts are active, the better. This is why you are advised to keep accounts active, even if you don’t use them frequently.

4. Credit Mix (10%)

You should have a mix of different types of credit. This includes credit cards, retail accounts, installment loans and more. This demonstrates the ability to handle different types of credit responsibilities in the right way.

5. New Credit Applications (10%)

You shouldn’t open so many accounts within short time intervals. This makes it seem like you are stretched financially. Space out new credit applications when possible.

Credit Score Mistakes That Might Be Hurting You

Now, there are some credit score mistakes that some make regularly, which harms them. They include:

Maxing Out Credit Cards, Even If You Pay in Full

You may be able to pay the balance in full every month. Regardless, it is wise to avoid using up to the limit of your credit. This is because credit card firms may report outstanding balances to the credit bureaus already. That’s before you pay. Make payments mid-cycle to ensure your utilization remains low.

Ignoring Small Debts

Even if the amount owed is minimal, it has a bearing on a person’s credit score. That’s if the balance goes to a collections agency. More often than not, library fines and parking tickets will not directly affect your credit. If they are forwarded to the collections department, they can damage your score.

Opening Retail Cards for One-Time Discounts

The offer of getting 20% off on a purchase through opening a store credit card is tempting. But this will lead to multiple hard inquiries and new accounts that will harm your score. Such cards also come with high interest rates. As such, they are expensive if you carry a balance.

In Closing

It’s important to know credit score myths and separate them from credit score facts.

Once you know this, you’ll likely make the right decisions to enhance your credit. Always remember that good credit cannot be achieved overnight. Constant and responsible conduct has the most rewarding outcomes.

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