Credit Myths Busted Believe personal finances, one of the most widely misunderstood areas is credit. From the confusion about credit scores to misconceptions about credit cards, there are many myths that continue to circulate. These myths can lead to poor financial decisions, which can, in turn, hurt your credit and overall financial health. In this article, we will debunk some of the most common credit myths and provide you with the facts to help you better navigate the world of credit.
1. Myth 1: Checking Your Credit Report Will Hurt Your Credit Score
Credit Myths Busted Believe that checking their own credit report or score will lower it. This is one of the most common credit myths. The truth is, checking your own credit report is considered a soft inquiry and has no impact on your credit score.
In fact, it’s advisable to check your credit report regularly to monitor for any errors or signs of identity theft. The law entitles you to one free credit report per year from each of the three major credit bureaus: Equifax, Experian, and TransUnion.
Key takeaway: Checking your own credit report is free and does not affect your credit score.
2. Myth 2: Closing Old Credit Accounts Will Improve Your Credit Score
Credit Myths Busted Believe is that closing old or unused credit accounts will help improve your credit score. In reality, closing a credit account can hurt your score, especially if the account has a long history of positive payment behavior.
Credit scores take into account your credit utilization ratio (the amount of credit you’re using relative to your available credit). By closing old accounts, you reduce your total available credit, which can increase your credit utilization ratio and negatively impact your score.
Key takeaway: It’s better to leave old accounts open, even if you don’t use them, as long as they aren’t costing you in annual fees or other charges.
3. Myth 3: Your Credit Score Is Only Affected by Debt
Many people think that their credit score is only influenced by the amount of debt they have. While debt is an important factor, it’s not the only one. Credit scoring models, such as FICO, take several factors into account, including:
- Payment history (35%): Whether you make your payments on time.
- Credit utilization (30%): The amount of available credit you’re using.
- Length of credit history (15%): How long you’ve been using credit.
- Types of credit used (10%): A mix of credit accounts, such as credit cards, mortgages, and installment loans.
- New credit (10%): How often you apply for new credit.
This means that even if you don’t have a large amount of debt, factors like missed payments or opening too many new accounts could hurt your score.
Key takeaway: Debt is just one of several factors that affect your credit score.
4. Myth 4: A Higher Income Automatically Means a Better Credit Score
Many individuals assume that having a higher income will automatically lead to a better credit score, but this is not the case. While having a higher income can make it easier to pay off debts and bills on time, your income itself does not directly influence your credit score.
Credit scoring models look at your credit history and how responsibly you handle debt, not how much money you make. For example, someone with a lower income but excellent credit management may have a higher credit score than someone with a higher income but poor financial habits.
Key takeaway: Your income does not impact your credit score. Credit scores are based on your credit behavior, not how much money you earn.
5. Myth 5: All Debt Is Bad for Your Credit Score
It’s a common misconception that all forms of debt hurt your credit score. In reality, some types of debt can actually improve your score if managed responsibly. For instance, credit cards can help build your credit history if you make on-time payments and keep your credit utilization low. Similarly, having a student loan or auto loan and making regular payments can contribute positively to your credit score.
On the other hand, missing payments, maxing out your credit cards, or defaulting on loans can have a negative impact. It’s not the existence of debt that harms your credit score, but rather how you manage it.
Key takeaway: Not all debt is bad. The key is managing it responsibly by making timely payments and keeping balances low.
