Credit Score Myths: What Really Affects Your Credit Score

Introduction

Your credit score is a critical part of your financial life, affecting everything from loan approvals to interest rates on credit cards and even insurance premiums. Unfortunately, there are many misconceptions about what really influences your credit score, and these myths can lead to unnecessary worry or, worse, poor financial decisions. In this article, we’ll debunk some of the most common credit score myths and clarify what truly affects your score.

1. Understanding Credit Scores and Why They Matter

A credit score is a numerical representation of your creditworthiness. Lenders, landlords, and even some employers check credit scores to assess risk. Scores typically range from 300 to 850, with higher scores indicating better creditworthiness. Understanding what impacts your credit score can empower you to make decisions that improve your financial health.

2. Credit Score Myth #1: Checking Your Credit Report Hurts Your Score

Fact: Checking your own credit report does not affect your score.

Many people believe that checking their credit report will lower their credit score. However, there are two types of credit checks, or “inquiries”: hard inquiries and soft inquiries.

• Hard Inquiries: These occur when a lender reviews your credit report to make a lending decision, like approving a loan or a credit card. Hard inquiries can impact your score slightly, but usually only by a few points, and they remain on your report for two years.
• Soft Inquiries: When you check your own credit or a company checks it for non-lending purposes (like a background check), it’s considered a soft inquiry. Soft inquiries have no effect on your score. In fact, regularly reviewing your credit report is a good practice to detect errors or signs of fraud.

3. Credit Score Myth #2: Closing Old Accounts Improves Your Credit Score

Fact: Closing old accounts can actually hurt your score.

Many people think that closing old, unused credit accounts will boost their score, but this can actually have the opposite effect. Here’s why:

• Credit Utilization Ratio: Your credit utilization ratio, or the percentage of credit you’re using compared to your available credit, is a major factor in your score. Closing an old account reduces your available credit, which can increase your utilization ratio if you carry balances on other accounts.
• Credit History Length: The length of your credit history accounts for about 15% of your score. Older accounts help establish a longer, healthier credit history, so closing them can shorten your credit age and potentially lower your score.

Unless you have a compelling reason to close an old account, like high annual fees, keeping it open is often better for your credit score.

4. Credit Score Myth #3: Carrying a Balance Improves Your Credit Score

Fact: Carrying a balance doesn’t improve your score and costs you in interest.

One of the most persistent myths is that carrying a balance from month to month will improve your credit score. In reality, credit bureaus don’t reward you for carrying a balance.

• Credit Utilization: While using your credit card regularly can be beneficial for building credit, you should aim to keep your utilization low by paying off your balance in full each month. Ideally, aim to use less than 30% of your available credit to maintain a good score.
• Interest Costs: Carrying a balance incurs interest charges, which can add up over time. Paying off your balance each month saves you money and shows responsible credit management without costing you extra.

5. Credit Score Myth #4: Income Affects Your Credit Score

Fact: Your income does not impact your credit score.

Your credit score is based solely on your credit behaviors, not your income level. Lenders may ask about your income to assess your ability to repay loans, but income isn’t a factor in credit score calculations.

Credit scores are based on five primary factors:

1. Payment History (35%): Your track record of on-time payments is the biggest factor.
2. Credit Utilization (30%): How much credit you’re using relative to your credit limits.
3. Length of Credit History (15%): The average age of your accounts.
4. Credit Mix (10%): The variety of credit accounts you have, like credit cards, loans, and mortgages.
5. New Credit (10%): Recent applications for new credit, which can cause slight, temporary dips in your score.

Income may indirectly affect your creditworthiness by influencing how much debt you take on, but it doesn’t directly impact your score.

6. Credit Score Myth #5: Using a Debit Card Improves Your Credit Score

Fact: Debit card use has no impact on your credit score.

Debit cards are linked to your bank account, so using them doesn’t involve borrowing money and won’t help build credit. Credit scores reflect your ability to manage borrowed funds, which is why only credit accounts (like loans, mortgages, and credit cards) impact your score.

If you want to build credit, use a credit card responsibly and pay it off in full each month. This will contribute positively to your credit history and help build a strong score over time.

7. Credit Score Myth #6: All Debts Are Equally Harmful to Your Score

Fact: Not all debts impact your score the same way.

Credit scoring models treat different types of debt differently. Credit card debt, for instance, can impact your score more than installment loans (like student loans or mortgages) if your credit utilization is high.

• Revolving Debt vs. Installment Debt: Revolving debt (credit cards) affects your credit utilization, while installment loans don’t impact this ratio. High credit card balances can lower your score significantly if you’re close to your credit limit, whereas installment loan balances have less of an effect.
• Diverse Credit Types: Having a mix of credit types (credit cards, loans, etc.) can improve your score, as it shows your ability to handle various forms of credit responsibly.

8. Credit Score Myth #7: Paying Off Collections Automatically Improves Your Score

Fact: Paying off collections can help, but it may not remove them from your report.

While paying off collections is generally a good idea, it doesn’t automatically erase the account from your credit report. Collection accounts can stay on your report for up to seven years from the original delinquency date.

However, the impact of a collection account on your score decreases over time. Some scoring models, like FICO 9 and VantageScore, treat paid collections less negatively than unpaid ones, but older scoring models may not consider this distinction.

9. Credit Score Myth #8: Opening a New Credit Card Will Instantly Improve Your Score

Fact: Opening a new credit card may help your utilization but can also lower your score temporarily.

While opening a new credit card can reduce your credit utilization ratio (by increasing your overall credit limit), it can also lead to a temporary dip in your score for two main reasons:

1. Hard Inquiry: When you apply for new credit, the lender performs a hard inquiry, which can slightly lower your score for a short period.
2. Reduced Average Credit Age: Adding a new account reduces the average age of your credit history, which can also impact your score.

While new credit can benefit your score over time if managed responsibly, don’t expect immediate improvements.

10. Credit Score Myth #9: Only People with Poor Credit Need to Worry About Their Score

Fact: Everyone should be aware of their credit score, regardless of their financial situation.

Even if you have a high credit score, monitoring and maintaining it is essential. Credit scores can impact:

• Interest Rates: A few points can make a difference in the interest rates you receive on loans and credit cards.
• Insurance Premiums: Some insurers consider credit scores when determining your premiums.
• Job Opportunities: Certain employers check credit history as part of their hiring process, especially for positions involving financial responsibility.

Staying informed about your credit score and managing it wisely can benefit you, even if your score is currently strong.

Conclusion

Credit scores are influenced by several specific factors, but myths and misconceptions often cloud our understanding of them. By separating fact from fiction, you can take control of your credit health, make smarter financial choices, and ultimately achieve better outcomes in your borrowing and spending decisions.

Understanding what truly affects your score – like payment history, credit utilization, and account longevity – can empower you to take meaningful actions toward a strong credit profile. Remember, good credit habits are built over time, so focus on consistent, responsible financial behavior to see positive results.