Credit Score Myths Debunked: Separating Fact from Fiction

Credit scores. You’ve probably heard about them, maybe even worried about them. They are a crucial part of your financial life, influencing everything from getting a loan for a car or house to even renting an apartment. Because they play such a big role, there are a lot of misunderstandings and myths floating around about them. Let’s clear up some of the most common misconceptions and get you on the right track to understanding your credit score.

One widespread myth is that checking your own credit score will hurt it. This is completely false! Checking your own credit score is considered a “soft inquiry” or “soft pull.” Soft inquiries happen when you check your own credit, when businesses check your credit for pre-approved offers, or when employers do background checks (with your permission). These types of inquiries do not affect your credit score at all. What does impact your score are “hard inquiries” or “hard pulls.” These occur when you apply for credit, like a credit card, loan, or mortgage. Lenders need to see your credit history to decide whether to lend to you, and these hard inquiries signal to credit bureaus that you are actively seeking credit. While too many hard inquiries in a short period can slightly lower your score, checking your own score is always safe and encouraged.

Another common myth is that your income directly affects your credit score. While income is certainly important for your overall financial health, it is not a factor in calculating your credit score. Credit scores are all about how you manage credit and debt. They focus on your payment history, the amount of debt you owe, the length of your credit history, new credit applications, and the types of credit you use. Lenders will definitely consider your income when deciding whether to approve you for credit, as they need to know you can repay the loan. However, the credit scoring models themselves, like FICO and VantageScore, do not include income in their calculations. Someone with a high income can still have a poor credit score if they don’t manage their credit responsibly, and someone with a lower income can have an excellent credit score by being diligent with payments and debt.

A further misunderstanding is that paying off a debt immediately improves your credit score. While paying off debt is always a good financial move and will improve your overall financial standing, the impact on your credit score isn’t always instant. Paying off debt, especially revolving debt like credit card balances, will definitely help your credit utilization ratio, which is a significant factor in your score. However, the positive effect might not be reflected immediately. Credit bureaus typically update information monthly based on reports from lenders. So, it can take a billing cycle or two for the payoff to be reported and reflected in your score. Also, the impact of paying off a single debt might be less dramatic if you have other negative marks on your credit report, like late payments. Consistent, responsible credit behavior over time is what truly builds a strong credit score.

Many people also believe that closing old credit card accounts will improve their credit score. In reality, closing older accounts, especially those with a long and positive payment history, can actually hurt your score. Two key factors in your credit score are the length of your credit history and your credit utilization ratio. Closing older accounts shortens your average credit history, which can negatively impact your score. Additionally, if you close a credit card with a high credit limit, it can increase your credit utilization ratio, especially if you carry balances on other cards. Credit utilization is calculated by dividing your total credit card balances by your total available credit. Closing accounts reduces your total available credit, potentially increasing your utilization and lowering your score. It’s generally better to keep older, unused credit card accounts open (as long as there are no annual fees) to maintain a longer credit history and a lower credit utilization ratio.

Finally, another myth is that credit cards are bad for your credit score. This is also untrue! Credit cards, when used responsibly, are actually powerful tools for building and improving your credit score. They allow you to demonstrate responsible credit management by making timely payments and keeping your balances low. Using a credit card for small, everyday purchases and paying off the balance in full each month is a great way to build a positive credit history. The key is responsible use – avoiding maxing out credit cards, making payments on time, and not opening too many accounts at once. It’s the misuse of credit cards, not the cards themselves, that can damage your credit score.

Understanding the truth about credit scores is essential for making smart financial decisions. By debunking these common myths, you can move forward with accurate knowledge and take control of your credit health.