Understanding credit can be confusing, especially with so many myths floating around. These myths can lead to misunderstandings and poor financial decisions. Let’s debunk some of the most common credit myths and set the record straight.
Myth 1: Checking Your Own Credit Score Will Hurt It
Many people believe that checking their own credit score will negatively impact it. This is a myth. When you check your own credit, it’s considered a “soft inquiry” and does not affect your credit score. Regularly checking your credit report can help you stay on top of your credit health and identify any errors or suspicious activity.
Reality: Monitoring your credit score is a smart financial practice. It allows you to catch and address potential issues early, helping you maintain a healthy credit score over time. Utilizing services like our Free Credit Report Review can assist you in this process without any negative impact on your score.
Myth 2: Closing Old Accounts Improves Your Credit Score
Contrary to popular belief, closing old credit accounts can actually harm your credit score. Length of credit history is a factor in your credit score calculation, and closing old accounts can shorten your average account age. Additionally, closing accounts can increase your credit utilization ratio, which could lower your score.
Reality: Keeping old accounts open, even if you don’t use them frequently, can benefit your credit score. It’s better to manage these accounts responsibly, maintaining low balances and making timely payments. If you’re unsure about how to manage multiple credit accounts, our Creditworthy Course offers valuable insights and strategies.
Myth 3: Paying Off a Debt Removes It from Your Credit Report
Paying off a debt is a positive action, but it doesn’t remove the debt from your credit report immediately. The account will remain on your report for up to seven years, showing that it was paid off. This can be beneficial, as it demonstrates your ability to manage and repay debts.
The only exception to this rule is medical collections. Based on a new rule change by the credit bureaus, once a medical collection is paid in full or settled, it will be removed from the credit report.
Reality: A paid-off debt remains on your credit for seven years if it is a negative account and ten years if it is a positive account. A paid collection or charge off account, does not remove the negative history from the credit report. In some scenarios when you settle or pay in full a charge off account, you may see an increase in your credit score. It shows future lenders that you have a history of managing and repaying your debts, which can be advantageous when applying for new credit.
Myth 4: You Only Have One Credit Score
In reality, you have multiple credit scores. Each of the three major credit bureaus (Equifax, Experian, and TransUnion) generates a score based on the information they have about you. Additionally, different scoring models, such as FICO and VantageScore, can produce different scores.
Reality: Understanding that you have multiple credit scores can help you get a more complete picture of your credit health. Each score might vary slightly, but together they provide a comprehensive view of your creditworthiness. Regularly checking scores from all three bureaus is advisable.
Difference Between FICO Scores and VantageScores
FICO Scores: Developed by the Fair Isaac Corporation, FICO scores are the most widely used credit scores in lending decisions. FICO scores range from 300 to 850 and consider factors such as payment history, credit utilization, length of credit history, new credit, and credit mix. There are multiple FICO score models, including FICO Score 8, FICO Score 9, and industry-specific scores like those for auto loans and credit cards.
VantageScores: Created by the three major credit bureaus, VantageScores also range from 300 to 850 but use a slightly different scoring model. VantageScore places more emphasis on recent credit behavior, which can result in different scores compared to FICO. VantageScore versions include VantageScore 3.0 and the latest VantageScore 4.0, which incorporates trended data.
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Myth 5: Paying Bills on Time Is the Only Factor in a Good Credit Score
While paying bills on time is crucial, it’s not the only factor affecting your credit score. Other factors include credit utilization, length of credit history, types of credit accounts, and recent credit inquiries. A comprehensive approach to managing all these factors is essential for maintaining a good credit score.
Reality: A holistic approach to credit management is necessary. This means keeping your credit card balances low, maintaining a mix of credit types, and being cautious about opening new credit accounts. Our Credit Building Tools can help you understand and manage these different factors effectively.
Myth 6: Debit Cards Help Build Credit
Many people think that using debit cards can help build credit, but this is not the case. Debit card usage is not reported to the credit bureaus and therefore does not affect your credit score.
Reality: To build or improve your credit score, you need to use credit products, such as credit cards, loans, and lines of credit. Responsible use of these products, such as paying off balances in full and on time, will be reflected positively in your credit report.
Myth 7: Carrying a Balance on Your Credit Card Boosts Your Score
A common misconception is that carrying a balance on your credit card helps boost your credit score. In fact, carrying a balance can increase your credit utilization ratio, which could negatively impact your score.
Reality: Paying off your credit card balance in full each month is the best practice for maintaining a healthy credit score. High credit card balances can signal to lenders that you are over-reliant on credit, which is a risk factor.
Myth 8: Your Income Affects Your Credit Score
Some believe that a higher income directly translates to a higher credit score. However, your income is not considered in the calculation of your credit score.
Reality: Credit scores are based on your credit behavior, not your income. While a higher income can help you manage your credit more effectively by allowing you to pay off debts more easily, it does not directly impact your credit score. Lenders may consider your income during the application process, but it is not a factor in your credit score itself.
By understanding and debunking these common credit myths, you can make more informed decisions about your credit and financial health. For more in-depth guidance and tips on managing your credit, visit our Creditworthy Blog or check out our FAQ for additional insights.
