Myth: Checking Your Credit Score Hurts It
One of the most pervasive myths about credit scores is the idea that checking your own score will harm it. This misunderstanding likely stems from confusion between "soft" and "hard" credit inquiries. A soft inquiry occurs when you check your own credit score or when a lender pre-approves you for a loan. These types of inquiries have no impact on your credit score. On the other hand, a hard inquiry happens when a lender checks your credit as part of a formal application for credit, such as a mortgage or car loan. Hard inquiries can affect your score, but the impact is typically minimal and temporary.
Regularly checking your credit score is actually a good practice and an essential step in maintaining your financial health. By reviewing your score, you can:
- Identify any potential errors or signs of identity theft early on.
- Track your progress and make informed financial decisions without fear.
Most major credit bureaus and financial institutions now offer free tools to help you monitor your credit score without impacting it. Embracing these tools can empower you to stay proactive with your credit health.
It’s also worth noting that credit scoring models are designed to take multiple hard inquiries into account when they occur within a short period of time. For example:
- If you're shopping for a mortgage or auto loan, multiple lender inquiries within a 14- to 45-day window are grouped together as a single inquiry.
- This feature allows consumers to shop for the best rates without worrying excessively about their credit score.
Myth: Closing a Credit Card Always Improves Your Score
Another common misconception is that closing a credit card account will automatically boost your credit score. While it might seem logical to assume that reducing the number of open accounts could be beneficial, the reality is more nuanced. Closing a credit card can actually hurt your score in two key ways:
- By reducing your available credit limit, which could increase your credit utilization ratio.
- By shortening your credit history, which is a factor in your score calculation.
Your credit utilization ratio, the percentage of available credit you're currently using, is a major factor in your credit score. For example:
- If you have a total available credit of $10,000 and a balance of $2,000, your utilization ratio is 20%.
- If you close a card with a $5,000 limit, your utilization ratio jumps to 40%, potentially lowering your score.
Additionally, credit scoring models consider the age of your accounts. Closing an older card could shorten your credit history and negatively impact your score. Instead of closing unused cards, consider:
- Keeping them open and using them occasionally for small purchases that you can pay off immediately.
- Maintaining the account to contribute positively to your credit profile.
Myth: Carrying a Balance Improves Your Credit Score
Many people mistakenly believe that carrying a balance on their credit cards helps build or improve their credit score. This is a myth. Carrying a balance results in paying unnecessary interest without any real credit benefit. Instead, focus on these best practices:
- Pay your bills on time.
- Keep your credit utilization ratio below 30% (ideally, pay off your balance in full each month).
- Avoid accumulating unnecessary debt.
Credit scoring models reward responsible credit use, not carrying a balance. Unchecked balances can lead to debt accumulation, making it harder to improve your financial health. If you’re aiming to improve your credit score:
- Make timely payments.
- Reduce your credit card balances.
- Steer clear of unnecessary new debt.
Myth: You Only Have One Credit Score
Another myth that often causes confusion is the assumption that you have a single, universal credit score. In reality, there are multiple credit scoring models. Your score can vary depending on:
- Which model is being used (e.g., FICO or VantageScore).
- Which credit bureau's data is being referenced (Equifax, Experian, or TransUnion).
For example, a lender might use a different FICO score version for a car loan compared to a mortgage. Additionally, slight variations in the data held by each bureau can lead to score differences. Key takeaway:
- Focus on maintaining good credit habits across the board—such as paying bills on time and keeping your credit utilization low.
These habits will positively impact all your scores regardless of the model or bureau.
Myth: Your Income Affects Your Credit Score
It’s a common belief that your income plays a direct role in determining your credit score, but this is incorrect. Credit scores are calculated based on credit behavior, not your income level. Important factors include:
- Payment history.
- Credit utilization.
- Length of credit history.
- Types of credit used.
- Recent inquiries.
Lenders may consider your income to evaluate your ability to repay loans, but this is entirely separate from your credit score calculation. Even if you have a modest income, you can build and maintain a strong credit score by:
- Paying bills on time.
- Avoiding high levels of debt.
- Regularly monitoring your credit report for inaccuracies.
FAQs
- Does checking my credit score affect it?
- No, checking your own credit score results in a soft inquiry, which does not impact your score.
- What happens if I close an old credit card?
- Closing an old card could shorten your credit history and increase your credit utilization ratio, which may lower your score.
- Can carrying a balance improve my credit score?
- No, carrying a balance does not improve your score and can lead to unnecessary interest charges.
- Why do I have multiple credit scores?
- Credit scores vary due to differences in models (e.g., FICO, VantageScore) and data reported by the three major credit bureaus.
- Does my income impact my credit score?
- No, income is not a factor in credit score calculations, though it may be considered by lenders for loan approvals.