Credit Chronicles: Debunking 5 Common Credit Myths

By now you’ve likely learned all about what credit is and what affects your score. But since credit is such a confusing topic, we thought we’d debunk some common myths that tend to get passed around as fact. Whether you’re dealing with a loan that’s trying to entice you to sign up or a store credit card that sounds promising, it’s important to always consider the source when it comes to beliefs around credit usage and best practices. Here are five credit myths about credit that we’re here to debunk.  

Myth #1: Closing a credit card improves your score 

When you finally pay off a credit card (yay! Go you!) it can be tempting to cut it up and close the account. But actually, your credit score is impacted by your credit utilization, which is how much credit you’re using in relation to how much credit is available to you. So when you close an account you’re not using anymore, you actually lower your total available credit, which makes your credit utilization go up. You’re better off keeping the account open but not using it, or using it for a small purchase every now and then and then immediately paying it off.

Of course, if having the account open is too tempting for you, you may be better off closing it. It’s better to not get further into debt if an open account and available credit may cause you to spend money you don’t have.

Myth #2: A store card can boost your score

Store credit cards may seem like a good way to save at your favorite retailers, but they’re not necessarily the smartest way to boost your credit. For one, store cards usually have lower limits than most credit cards, which raises your credit utilization ratio. They also tend to inspire more spending, which isn’t great when you’re trying to develop healthier habits with credit. If you’re really interested in opening up a store card, limit it to 1-2. Opening too many may be tempting, but it will be hard to keep track of when bills are due.

Myth #3: Checking your credit score hurts your credit

There’s a common misconception that by checking your credit score, you hurt your credit—but that’s not exactly how it works. 

To understand, it’s important to note that there are two types of credit checks: hard inquiries and soft inquiries. Hard inquiries happen when you’re actively applying for credit (for a house or a car, for example) and a lender looks up your credit as part of the decision-making process. Hard inquiries like these can affect your credit score, as having too many of them pull closely together might suggest that you’re racking up debt. 

But soft inquiries don’t affect your score in the same way. Soft inquiries are credit checks you didn’t initiate as part of a credit application, like when a company pre-approves you for a promotional offer for a credit card—or, when you’re simply checking your own credit to stay aware of your finances and not for a specific purchase or contract. In fact, it’s safe to check your score as many times as you want as long as you do it through credit scoring services and not mortgage lenders. The CFPB even notes that you’re entitled to a free credit report every year from each of the three major consumer reporting companies—so while it may be tempting to think ignorance is bliss, knowledge is power (and staying aware is encouraged!) when it comes to your credit score. For more information about the ins and outs of credit reports, click here.

Myth #4: It can take years to improve your credit

Boosting your credit score definitely takes commitment. But with the right credit practices, you can see even small improvements in months, not years. Paying down a large balance or getting a credit limit increase can lower your utilization rate and, in turn, boost your credit score. Continuing to pay your bills on time and keeping balances as low as possible will also help you gradually boost your credit score over time. 

Myth #5: Making more money boosts your credit score

A higher income doesn’t quite directly impact your credit score. Whether you make $25,000 a year or $250,000 does not factor into that pesky little number. The things that do affect your credit score? Things like your payment history, credit utilization, and credit mix—all of which you can read about in “What Affects My Credit Score?” While income doesn’t boost your credit score, it is something that lenders take into account when providing you credit, as it’s a measurement of capacity to pay your bills. Updating a higher income with a card issuer may help increase your credit limit. Increasing your credit limit while keeping your spending the same can positively impact your credit utilization ratio. 

This blog post is intended for general information purposes only and should not be considered legal or financial advice.

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