7 credit score myths you shouldn't believe
By Dawn Papandrea
May 20, 2015
It's interesting how credit scores — which can impact your life in so many ways — are so frequently misunderstood, sometimes even by so-called financial experts.
We connected with those who deal with credit scoring on a daily basis to help dispel some of the common myths that could be clouding your financial know-how.
Take a look at the most common credit score misconceptions so you can keep your score facts straight:
1. Myth: Checking your credit score will lower it.
You have probably heard that anytime your credit score is pulled, it will cause your score to drop, but not all inquiries are created equal, says Ken Chaplin, senior vice president of TransUnion Interactive (one of the major credit bureaus, along with Experian and Equifax). This myth probably arose from the fact that when a third-party company checks your score with your approval, your score can be affected, he says. That's known as a “hard” inquiry, indicating that you're actively seeking credit.
However, when you request your own credit score for an educational purpose, that's a “soft” inquiry, and that will not impact your score. In fact, it's a good idea to keep tabs on your credit since that's the best way to make necessary improvements and maximize it, says Chaplin. You can check your scores for about $20 each at MyFICO.com; for free annual credit reports, on which the scores are based, go to AnnualCreditReport.com.
2. Myth: In order to get the best credit score, you have to carry a small balance on your credit cards.
While you do have to use credit in order to build credit, the notion that you need to have revolving balances to raise your score is simply not true, says J.J. Montanaro, a certified financial planner at USAA, a financial services company. “It's a common misconception, however; a zero balance is definitely better than carrying a balance,” he says. In fact, part of your score is based on the amount of credit you have available but aren't using, so try to keep your credit card balances below 25 percent of your total credit limit, and as close to zero as possible.
The important thing is that you have access to credit and use it, adds Chaplin. Your best course of action is to use your cards regularly, but pay them off in full each month. That way, you are showing you know how to manage plastic responsibly (the No. 1 factor that impacts your credit score), but won't have to pay interest on your purchases.
3. Myth: Closing old accounts will hurt your credit score.
Because credit history is one of the contributing components that make up your credit score, what you do with old accounts could affect you, but probably not for the reason you think. “The true part of this myth is that longer is better in terms of your credit history,” says Montanaro. Although closing an old card will reduce the length of your average account age, closed accounts remain on your credit report for 10 years anyway if you paid as agreed (seven years if you didn't).
“The farther things get in the rear view mirror, the less of an impact on your score.”
–J.J. Montanaro, USAA
One reason why closing any account could have an impact (regardless of how long you have it) is that it will reduce the amount of your available credit, thus impacting your utilization if you carry balances. Here's Montanaro's example: You have $10,000 of available credit across several cards, but you close one card that has a $7,000 credit limit. Now, you drop down to $3,000 of available credit. If you owe $1,500, your once 15 percent utilization now becomes a 50 percent utilization. In that scenario, you were better off keeping the additional card open.
4. Myth: Opening more accounts will lower (or raise) your score.
Although it is good to build a healthy mix of different credit types, such as credit cards and installment loans (such as car loans or mortgages), there is no magic number of accounts for which one should strive. “It's more about what you do with your accounts than the number of accounts you have,” says Montanaro. One thing that is a red flag in terms of scoring, however, is if you apply for multiple loans (but not mortgage loans, which tend to be lumped together as one inquiry) or cards in a short period of time, he says. Several inquiries at once could signal to lenders that you might be having cash flow problems.
On the other hand, as long as you're paying all your obligations on time, it shouldn't matter if you have three accounts vs. seven accounts. The key is not getting in over your head. “Having access to more credit is a good thing, but there's a danger in that unless you're very disciplined,” warns Chaplin.
5. Myth: Paying off a negative item means your score will soar.
The key message to keep in mind when it comes to your credit score is that dramatic change does not happen overnight, says Montanaro. So, yes, if you pay off a maxed card in full, it will give your score a boost because the utilization will improve drastically. However, when it comes to reconciling delinquencies, those negative items remain on your credit file for seven years, but their effect diminishes over time. “The farther things get in the rear view mirror, the less of an impact on your score,” he adds.
6. Myth: Making on-time payments for your rent and cellphone bill helps your credit score.
This is one of those situations in which your good behavior seems to go unnoticed, but bad habits can hurt you. Generally speaking, activities including paying your rent or cable TV are not reported to the credit bureaus. However, if your accounts are not paid on time and go to collections, that can be reported and send your score plummeting, says Montanaro. “In the realm of credit scoring, one of the biggest things is paying on time, every time,” he says. Whether it has a direct credit score impact or not, fostering good bill paying habits will help your big financial picture.
7. Myth: The higher your income, the better the credit score.
Nearly half (48 percent) of respondents who've checked their credit report in the past year incorrectly believed an increase in income would improve their credit score, according to a recent TransUnion survey. While you might think this makes sense, the truth is that income is simply not a part of credit scoring methodology, says Montanaro. The confusion probably comes in because income is usually an additional factor that lenders use along with credit score to determine if they will grant you credit or a loan.
There's no doubt that the intricacies of credit scoring can be confusing, which is why it's important to separate fact from fiction. When in doubt, just do your best to make on-time payments on all of your accounts, try to keep balances as low as possible, and don't open a lot of credit lines in the months right before you plan to apply for a major loan.
Finally, never be afraid to check your own credit reports and scores — it could be the single best thing you do for your finances. If you can follow those general rules, your score will thank you for it.