Let’s face it, credit is one of the most misunderstood aspects of personal finance. We’ve all heard various myths floating around about credit scores, credit cards, and how credit works in general. Whether it’s from family, friends, or online rumors, there’s a lot of misinformation that can lead to confusion and bad financial decisions. But the good news is, many of these myths are just that—myths.
Today, we’re going to bust some of the most common credit myths that may have been holding you back from mastering your finances. Let’s get into it!
Myth #1: Checking Your Credit Score Hurts It
If you’ve ever been hesitant to check your credit score because you thought it would hurt your score, you’re not alone. Many people believe that every time they look at their credit score, it causes a drop. But here’s the truth: checking your credit score doesn’t negatively affect it. There are two types of credit inquiries: soft pulls and hard pulls.
- Soft pulls happen when you check your own score or when a lender checks your score for pre-approval purposes. These don’t impact your credit in any way.
- Hard pulls occur when you apply for a new loan or credit card, and they might cause a small dip in your score temporarily. But don’t worry; these effects are usually short-lived and minimal.
So, don’t hesitate to keep tabs on your credit score. In fact, monitoring it regularly can help you stay on top of any changes or potential fraud.
Myth #2: Closing Old Credit Accounts Helps Your Credit Score
Another common misconception is that closing an old credit card will improve your score. In reality, the opposite is usually true. Closing old credit cards can actually hurt your credit score for a couple of reasons.
First, your credit history length makes up a significant part of your score. The longer your accounts have been open, the better it is for your score. So, when you close an old account, you shorten your average credit history, which can lower your score.
Second, closing a card reduces your overall credit limit, which increases your credit utilization rate (the amount of credit you’re using compared to your total available credit). A higher utilization rate can hurt your score. Therefore, it’s often better to leave those old accounts open, even if you’re not using them anymore. Just make sure to avoid any annual fees.
Myth #3: Carrying a Balance Boosts Your Credit Score
Some people believe that carrying a balance from month to month will help boost their credit score. This is a huge mistake. Credit card companies like to see that you are using your credit, but they also want to see that you’re able to pay it off regularly. Carrying a balance, especially if you’re only making the minimum payments, will only result in high interest charges and debt accumulation.
In fact, paying off your balance in full every month can help your score by keeping your credit utilization rate low. The ideal goal is to aim for using less than 30% of your total credit limit each month. So, always aim to pay your balance in full to avoid interest charges and keep your credit score in great shape.
Myth #4: All Credit Scores Are the Same
This one is a biggie! A lot of people believe that there’s just one universal credit score that’s used by everyone. However, the truth is that there are multiple credit scoring models, with the most common being FICO and VantageScore. These models may weigh the factors differently, meaning your score could vary slightly depending on which model is used.
Most lenders, though, rely on the FICO score, which ranges from 300 to 850. But you might also see other scores if you’re checking it through different services, so don’t be surprised if the numbers don’t always line up. Just remember, all scores are important, but the FICO score is the most widely used for lending decisions.
Myth #5: A Higher Income Means a Better Credit Score
While it’s true that having a higher income can help you manage your finances more effectively, it doesn’t directly affect your credit score. Your credit score is based on your credit history, how timely you make your payments, and how much credit you use, not how much money you earn.
That said, if you earn more and can pay off your balances in full every month, you’ll certainly have more financial freedom and the ability to maintain a good score. But income alone won’t raise your credit score.
Myth #6: You Should Never Have Debt
The idea that you should live completely debt-free is appealing, but it’s not realistic for many people. And in fact, it’s not always necessary or even ideal. Having some debt, such as a mortgage or student loan, isn’t a bad thing if you manage it properly. Responsible debt shows lenders that you can handle credit, which can improve your credit score over time.
What matters is how you handle that debt. If you consistently make on-time payments and don’t overextend yourself, having some debt can actually help you build a stronger credit profile. The key is not to overburden yourself with high-interest debt that you can’t manage.
Myth #7: Only Your Credit Card Payment History Matters
While your credit card payment history is certainly the most important factor in determining your score, it’s not the only thing that matters. Credit scoring models take several factors into account, and here’s a breakdown:
- Payment history (35%) – Timely payments are essential.
- Credit utilization (30%) – Keep it below 30% of your available limit.
- Length of credit history (15%) – The longer, the better.
- Types of credit used (10%) – A mix of credit cards, loans, etc., can help.
- New credit (10%) – Multiple inquiries or new accounts can negatively affect your score.
So, don’t neglect the other factors! Your credit utilization and the types of credit you have are also significant components of your overall credit health.
Myth #8: Paying Off a Collection Removes It from Your Credit Report
If you’ve ever paid off a debt that was in collection, you might have thought that doing so would automatically remove the negative mark from your credit report. Unfortunately, that’s not how it works. Even after you’ve paid off a collection account, the account will remain on your report for seven years from the original delinquency date.
However, paying off the debt does make the account show as “paid” or “settled,” which can be more favorable than an open collection. Some creditors might even be willing to negotiate with you to have the collection removed in exchange for payment, but this isn’t guaranteed.
Myth #9: All Credit Cards Are the Same
Many people assume that all credit cards are basically the same, but they’re not. In fact, there are several types of credit cards designed for different purposes:
- Rewards cards – Earn points, miles, or cashback.
- Low-interest cards – Great for carrying a balance with minimal interest.
- Secured cards – For people with poor or no credit.
- Student cards – Tailored for younger users with limited credit history.
Choosing the right credit card depends on your goals. Do you want to earn rewards? Are you trying to rebuild your credit? Or do you just need a card with low interest rates? Each card type serves a different purpose, so be sure to choose wisely.
Myth #10: You Can Improve Your Credit Score Overnight
This one’s easy to believe, but the reality is that improving your credit score takes time and patience. There are no quick fixes or “overnight” miracles. Yes, you can make some changes that may improve your score in a few months, such as paying down high balances or removing inaccuracies from your credit report. But consistent, responsible behavior over time is what truly builds a strong credit score.
It’s about making the right financial choices day in and day out, from timely payments to using credit wisely. Stick with it, and you’ll start seeing your credit score climb over time.
As you can see, there are plenty of myths surrounding credit, but with the right knowledge, you can make better decisions for your financial future. The most important thing is to stay informed, monitor your credit regularly, and be patient with the process. Your credit score doesn’t define you, but managing it well can certainly help you achieve your financial goals. Keep learning, stay diligent, and you’ll be on your way to mastering your credit in no time!