When it comes to qualifying for the best credit cards or renting an apartment, your credit score matters. While establishing a good credit score is a vital piece of your overall financial picture, there are many common misconceptions about what affects your credit score. We will debunk some of the most common credit myths, so that you can focus on building credit responsibly.
Myth: Checking my credit score will lower my credit score
False. Monitoring your score helps you track your progress when building credit, but it is important to check it the right way. Checking your credit score is considered a “soft pull,” which doesn’t affect your credit score. Actions, such as applying for a credit card, which requires a “hard pull,” temporarily dings your credit score. If you’re checking it from a legit source, like the credit bureaus themselves, or with Credit Union of Denver’s Credit Score & More feature, then it won’t hurt your score.
Myth: Approaching your credit limit does not negatively impact your credit score
False. Even if you pay off your credit cards every month, if your credit utilization ratio is high, it may impact your credit score. Your credit utilization ratio represents how much revolving credit you're using compared to the total amount available to you.
Myth: Carrying a balance on my credit card boosts my credit score
False. Carrying a balance on your credit card doesn’t help your credit score, but it has the potential to hurt it, and paying interest over time will become expensive. Lingering balances on your account directly affect your credit card utilization rate. The higher your credit card balance, the higher your utilization rate, which can in turn hurt your credit score.
Myth: Paying off debt increases your credit score
True and false. This is true for credit card debt, but not as true for installment debt, such as a mortgage or student loan. While it is good for your overall financial life to be totally debt free, you won’t see a jump in your credit score if you pay off your car loan, for example. It can actually lower your score because it means having fewer credit accounts. That doesn’t mean you shouldn’t pay off the loan, though; you don’t want to pay unnecessary interest just to save a few credit score points.
Myth: Closing a credit card improves my credit score
False. Closing a credit card will not improve your credit score and it’s likely to ding your score. If you’re thinking you should cancel your credit card, there are some alternatives to consider. If your card has no annual fee, then there’s really no harm in keeping it open. But if you’re losing money on the card, contact the card issuer and ask if you can switch to a no annual fee credit card. If you’re being charged a high interest rate, it might be beneficial to consider a balance transfer to a credit card provider with a lower interest rate.
There are several misunderstandings out there when it comes to credit, which can make it difficult to determine what information to listen to and what you should be ignoring. We hope debunking these myths may help you keep your financial goals on track. The more you learn, the more prepared you are to make financial choices.