You don’t have to look far to find conflicting information about credit reports, credit scores, credit cards, and similar topics. Unfortunately, believing the wrong credit myths could cost you in several ways.
Below are six common credit-related myths that could cause you problems. Learn the truth about these topics in advance so you’ll be better prepared to protect your credit and finances in the future.
Myth #1: It hurts your credit score when you check your own credit report.
Checking your three credit reports from Experian, TransUnion, and Equifax is essential to maintaining a good credit rating. That’s why the idea that it will hurt your credit scores to check your own reports is such a dangerous myth to believe.
Credit scoring models like FICO and VantageScore do consider the number of times others, like lenders or creditors, pull your credit reports. Many credit checks by others are known as “hard credit inquiries,” and they can potentially hurt your scores. But when you check your own credit, a “soft credit inquiry” occurs. Soft credit inquiries won’t affect your credit scores in any way.
There are numerous places you can access your credit reports for free, including AnnualCreditReport.com. However, getting free copies of your credit scores isn’t always as easy. Some of my favorite free resources for checking your credit reports and scores include:
- Credit Karma — Weekly credit reports and scores (VantageScore 3.0) from TransUnion and Equifax
- Experian — Monthly Experian credit report and score (FICO 8)
Myth #2: Paying your bills on time is all it takes to earn a good credit score.
Getting a high credit score may not be as simple as you think. Paying your bills on time is undoubtedly an important step, but 65% of your FICO Score has nothing to do with your payment history.
If you want to improve your credit score, you need to take other necessary steps. For example, it’s essential to pay off your credit card balances each month, not just to save money on interest, but also to keep your balance-to-limit ratio (aka your credit utilization ratio) low. (Credit utilization is a crucial component in your credit scores.) It’s also wise to avoid applying for and opening new credit accounts too often. It would help if you also had a good mixture of account types on your credit reports.
Myth #3: You have to pay someone to fix your credit for you.
Bouncing back from past credit mistakes and low credit scores can be difficult. But if you’re dedicated to turning your credit around, it is possible to boost your credit scores over time. There are even some steps you can take to help improve your credit quickly.
As you work to fix your credit, you may come across credit repair companies that advertise they can clean up your credit for you. While there’s nothing wrong with hiring a reputable credit repair company to work for you, it’s also your right to try to fix your credit yourself. A credit repair company can’t do anything that you can’t take the time to learn to do yourself.
If you do decide to hire a professional to work on your behalf, research the company in advance. Be sure you get information about the fees you will be charged and the company’s cancellation policy. The CFPB also reveals some red flags you should watch for if you decide to work with a credit repair company. Finally, you can visit the National Association of Credit Service Organizations (NACSO.org) to see if the company is an accredited member.
Myth #4: Credit cards are dangerous.
Some people believe that credit cards are a one-way ticket to financial disaster. Don’t get me wrong. There are times and situations where I think using credit cards could be dangerous. I also understand how easy it can be to use your credit cards the wrong way. Personally, I racked up $26,000 in credit card debt and had to work incredibly hard to pay it off and change my habits.
But I did pay off my credit card debt, and I learned how to manage my accounts responsibly. Now, I never charge more on my credit card than I can afford to pay off when the bill is due. If you track your spending and manage credit cards the right way, there’s nothing inherently wrong or dangerous about those little pieces of plastic. On the contrary, the right types of credit cards can potentially be a great tool to help you build positive credit.
If you can use a credit card wisely, pay it off in full every month, never carry a high balance, and never miss a payment, then a credit card isn’t dangerous. You must be honest with yourself if you can use a credit card responsibly.
Myth #5: You can’t qualify for new credit cards unless you already have good credit.
Building good credit can present a chicken-and-the-egg style problem. You need good credit to qualify for new accounts, but you need well-managed accounts to build good credit. How do you find a lender that will take a chance on you when you’re new to the world of credit (or you messed up your credit in the past)?
You might indeed have trouble qualifying for a big loan or a premium credit card if you have no credit or damaged credit history. But some lenders may be willing to give you a chance. For example, secure credit cards are worth considering if you want to build or rebuild your credit. Because you put down a deposit that’s equal to your credit limit when you open the account, the lender takes on less risk. So, you’ll be much more likely to qualify, even with credit problems.
Tip: It’s good to compare multiple offers before you apply for a secured credit card (or any other type of financing).
Myth #6: Keeping a balance on your credit card will help raise your credit score.
Carrying a balance on your credit card is not a good way to build a strong credit history, and there are no benefits to this myth.
In reality, carrying a balance can hurt your credit score and budget. Some believe this myth because they think that having a balance demonstrates responsible credit use. However, proving you are responsible with credit doesn’t mean you have to carry a balance.
Carrying a balance on your credit card means owing money to someone else and paying interest along the way. It can also hurt your credit score. The second most crucial factor that makes up your FICO score is credit utilization – the amount you owe in relation to your credit limits. If you are continuing to carry higher balances, your credit score could take a hit.
The best actions to take when dealing with credit card balances are to pay your credit card bills on time, keep your balances low, check your credit report for errors or discrepancies, and avoid opening credit cards that you don’t need.
Why It’s Important to Separate Credit Myths from Credit Facts
Good credit can be a powerful asset you can use throughout your life. It can help you qualify for financing when you need it, secure lower interest rates, save money on insurance premiums, and even land a job. You’ll be better able to earn and keep the solid credit rating you want and need when you learn how to separate fact from fiction.
I have noticed since I have paid off all my credit cards my credit score has dropped. This does not make sense, since I have not closed these accounts, two of them are locked and the one with the lowest interest rate is opened with a zero balance. Credit scores are a scam! There are three credit agencies each one with a different score. I have noticed in the past when I applied for a small business loan they used my worst score when evaluating me for the loan then offered me a higher interest rate because they used my worst score from one of these agencies. Now my scores are lower because I owe nothing. Doesn’t it make more sense to increase someone’s score because they have paid off what they owe, meaning you are someone they can trust?
Thank You so much for this article. I am trying to pay down my credit cards
Sharon,
A credit score is essentially a grade you are given to show how well you stack up against the rest of the potential borrowers in the world. It helps lenders to get a vision on how you pay your bills and use a lenders money (credit). They are loaning you their money and need to know the “risk score” of getting paid back. The less risk the more likely you will repay and so you’re granted a lower interest. The higher risk the higher interest so they have extra funds to cover losses for those that can’t pay.
While it says #6 is a myth, the partial truth is that if you don’t have any credit usage there is nothing to grade and therefore your score will drop. Companies will revoke credit cards that don’t get used often enough so that they can make that credit available for others that will. They are a business and interest charges are how they earn their money. Closing a card will affect your ratio of available credit and that too will make your scores drop.
Yes it’s great to be debt free but most of the “DEBT FREE” community is basing purchases on paying cash from there on. It’s great not to owe anyone but many don’t realize or fail to mention that not having a good credit score can affect; your interest rates of any future loans you take out or cosign, your ability to rent or cosign on a home or car rental, your insurance rates, or even potential hiring status.
The best option to have a good credit score is to learn what is included in the score, pay your bills on time, and use credit wisely. They record and report the highest amount charged during the month not just what you owe at the time they bill, so you can charge a small amount and immediately pay it off and it will still show as being utilized. I personally don’t consider it “being in debt” if it’s paid the same day from money you already have. It’s no different than using a debit card and “your bank promising to pay your money from your account” and then not processing it until the next business day. Plus, if you use it wisely it can earn cash rewards or points that you can use or gift.
Being out of debt doesn’t make a person financially solid but it’s a building block that paves the way to a sound financial future. Good luck and congrats on paying off your debt!!!
Thank you so much for your help, I’m very new at this but very interested in learning to help my family. You are a light of hope!!!
It’s also good to note even when a hard pull is done on your credit history it’s negligible and you can make it back up in due time as long you keep being responsible.