There is a general lack of awareness surrounding credit, as American consumers’ knowledge about credit scores has been on a steady decline since 2012. And when you aren’t informed about your credit, it can be easy to believe misinformation and even spread it to others.
Unfortunately, believing falsehoods about your credit can lead you to make bad credit choices. You can’t afford to be misinformed. Here are five credit score myths to stop believing:
Myth #1: Having debt hurts your credit.
The reality: Having too much debt, such as maxed out credit cards or a mortgage you can’t afford, can be bad for your credit. It can cause you to become overextended and even miss payments, which can tank your credit score. But the simple fact that you hold debt is not detrimental to your credit at all.
In fact, having debt helps you build a lengthy credit history. And when you have a manageable amount of debt and a good mix of debt types (along with making your payments on time), it shows creditors you are able to responsibly manage debt.
Myth #2: There’s only one credit report and one credit score.
The reality: There are three major credit bureaus — Experian®, Equifax® and TransUnion® – and each company has its own version of your credit report. Every report contains information about your finances and debts, but the information may not be identical across reports. When you apply for credit, the creditor may run reports from one of the credit bureaus or all three.
There also are different credit scoring ranges to analyze the information in your credit report and return a credit score. The FICO® Credit Score and the VantageScore® model are the most common, but there are others. Each scoring model can weigh your credit information differently to come up with your credit score.
Because there are multiple credit reports and many ways to score the information within, you’ll never have a single definitive credit score – it can fluctuate depending on which credit report and which scoring model are being used.
Myth #3: Checking your credit report harms your credit.
The reality: When you apply for credit, the creditor pulls your credit, and as a result a hard inquiry record can land on your credit report. Too many hard inquiries in a short time frame may show you are desperate for credit and could have a minor negative affect on your credit score.
However, checking your own credit report is known as a soft inquiry. Soft inquiries do not affect your credit score, no matter how many times you check your credit or even if you employ a credit monitoring service.
Myth #4: You should always close old credit cards.
The reality: When you have an old credit card you don’t use any more, you may be tempted to close it for simplicity’s sake. But doing so can actually cause some issues for your credit.
Old credit cards help extend the length of your credit history, which is one major factor that goes into calculating your credit score. Assuming the old credit cards have a low balance or are paid off, they also reduce your credit utilization (the amount of available credit you have tied up in debt), which is another factor that affects your credit score.
So, if you have trouble managing your finances and an old credit card is going to get you into hot water, go ahead and close it. But if you can use your card occasionally and otherwise let it collect dust, it’s a good idea to keep it open.
Myth #5: Good credit is only for the wealthy.
The reality: Having a large income can make it easier to achieve good credit, but it’s no sure thing. Wealthy people can have poor credit because of past bankruptcies, large amounts of debt, late payments and just about anything else. People with limited incomes can have great credit by living within their means and responsibly managing their debt.
When it comes down to it, you are in control of your credit.