Your credit score is one of the most critical financial metrics impacting your ability to borrow money, secure housing, or even land a job. However, many people still misunderstand how credit scores work despite its importance.
Misinformation can lead to poor financial decisions, unnecessary anxiety, or even lost opportunities. Let’s debunk some of the most common credit score myths that could hold you back from financial success.
Checking Your Credit Score Will Lower It
One of the most persistent myths is that checking your credit score will negatively affect it. In reality, checking your credit score through a personal inquiry – often called a soft pull or soft inquiry – has no impact on your score. You can and should check your credit regularly to stay informed about your financial health and catch any errors or fraudulent activity early.
However, if a lender checks your credit as part of a loan or credit card application, that’s known as a “hard inquiry.” Multiple hard inquiries within a short period can temporarily lower your score. That’s why it’s essential to be strategic about when and how often you apply for new credit.
Closing Old Credit Accounts Will Improve Your Score
Many people believe that closing old credit accounts will boost their credit score, but this can have the opposite effect in most cases. One of the key factors in calculating your credit score is the length of your credit history. By closing an old account, you reduce the average age of your credit accounts, which can lower your score.
Closing an account decreases your total available credit, which can increase your credit utilization ratio – a crucial metric that compares your credit balances to your total credit limit. A higher utilization ratio can negatively impact your score. Instead of closing old accounts, consider keeping them open and using them occasionally to maintain your credit history.
Carrying a Balance Improves Your Credit Score
Another widespread misconception is that carrying a balance on your credit card will boost your credit score. The truth is that carrying a balance doesn’t help; it costs you money in interest charges and can harm your credit utilization ratio. Credit utilization is the percentage of your total available credit that you are using, and it’s a significant factor in your credit score.
Ideally, you should keep your utilization below 30%, but the lower, the better. Paying off your balance in full each month is the best way to maintain a strong credit profile while avoiding unnecessary interest payments.
Your Income Directly Affects Your Credit Score
While your income is vital to your overall financial health, it does not directly impact your credit score. Credit scores are calculated based on your credit history, which includes factors like payment history, credit utilization, and the length of your credit accounts.
That said, your income can indirectly affect your score. A higher income can make paying off debts on time easier, keeping your credit utilization low and avoiding missed payments. But earning more money won’t automatically raise your score; how you manage your credit matters.
Applying for a Loan Will Always Hurt Your Score
Applying for new credit can result in a temporary dip in your credit score due to the hard inquiry process. However, this dip is usually small and short-lived, especially if you have a strong credit history.
Applying for a loan from a reputable lender like MoneyKey can be a responsible financial move when done wisely. When you need funds for an emergency expense, choosing a transparent and trustworthy lender can help you manage your finances effectively. The key is to borrow responsibly, make timely payments, and avoid taking on more debt than you can handle.
Only Credit Card Activity Affects Your Credit Score
Many assume that only credit card usage impacts their credit score, but that’s far from the truth. Your credit score considers various credit accounts, including mortgages, auto loans, student loans, and personal loans.
A well-managed mix of credit types can benefit your score, demonstrating your ability to responsibly handle different forms of credit.
Other factors, such as missing utility payments or defaulting on a rental agreement, can indirectly impact your score if reported to credit bureaus. That’s why being financially responsible across all areas of your credit and payment obligations is essential.
