A good credit score is a key part of being financially stable. Although it’s not a foolproof system, it’s vital to do what you can to boost it as much as possible. Improving it as much as possible usually results in lower interest rates when you need to borrow money. On the flip side, a bad score can be detrimental to your budget. Unfortunately, there are many credit score myths that people fall for time and again. These are 14 common myths about credit scores you need to avoid believing.
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All Debt Is the Same
Debt is debt, right? While it’s true in essence, that’s not the case with your score. A lender views $100,000 in credit card debt much differently than a mortgage.
The former reveals overspending and risk. The latter, with regular payments, shows the exact opposite.
Checking Your Credit Will Hurt Your Score
Trying to get a loan results in an inquiry on your credit report. That can have a short-term negative impact on your credit.
Simply checking your credit is not the same. In fact, it shows you’re financially responsible.
It Helps Your Score to Leave Debt On Your Credit Card
There’s a wild myth that people believe that states it’s good to leave debt on a credit card. The idea is that paying it off will hurt your credit score.
That is simply incorrect. Paying off your cards in full each month shows the exact opposite. It shows that you’re disciplined and can actually boost your credit.
Closing a Credit Card Will Increase Your Score
It makes sense, in theory, but closing a credit card will often hurt your credit, not improve it. It impacts the age of your credit, which is one of the most important components of your score.
Closing can also impact your credit utilization score, which is another important piece of your score. Instead of closing it, use it once a month and pay it off in full to help boost your credit.
A Good Credit Score Means You’re Rich
Having a good credit score means you’re rich, correct? Wrong. Your credit score has nothing to do with your income or wealth. A credit score is merely a number indicating if you’re a good or bad credit risk.
It’s more than possible to be wealthy and have a poor credit score. You can also have more modest means and have a fantastic score.
A Perfect Credit Score Is Necessary
Having a perfect credit score of 850 is great, but it’s not truly needed. As long as your score is at least in the 720-740 range, you will typically get the best available rates.
A Good Credit Score Isn’t Important Until You’re Older
You can apply for a credit card on your own at 18. This is usually when you need to be concerned about managing your credit.
You don’t need to wait until you’re older to focus on it. Doing so will be to your own detriment.
Your Employer Can See Your Credit Score
Prospective employers can view your credit report. In some cases, they need to. This holds true if you’re entering a field like finance.
However, they can’t see your credit score.
Selecting Credit When Using a Debit Card For a Purchase
Does it benefit you in any way to select “credit” when using your debit card for a purchase? No, it does not.
Not only does debit card activity not get reported to agencies, you’re not really tricking the system. When you use your debit card at the cash register, the money immediately comes out of your checking account. That’s all that happens.
Paying Off Debt Improves Your Credit Score
This works both ways. Paying off credit card debt is a good thing and typically results in an improved score.
However, installment payments like a mortgage, auto loan, or student loan may result in a slightly lower score when you pay them off in full. Don’t ignore repaying them, though, since it’s good to avoid interest. Plus, it’s always good to be debt-free.
Debit Cards Help Your Credit Score
Debit cards and credit cards are completely different. The former is tied to your bank account and doesn’t reflect on your credit.
All Three Credit Reports Have the Same Information
Equifax, Experian, and TransUnion are three different reporting agencies. Not every lender reports to all three bureaus, so not all three will have the same exact information.
In fact, your score may be different at each agency, and that’s okay.
Spouses Have the Same Credit Score
Joint credit reports don’t exist. Credit reports are tied to you as an individual. This is regardless of if you file taxes jointly or have a joint bank account.
Be careful, though, as a joint loan can hit both of your reports. If you miss payments, you will both likely feel the pain.
Credit Is Difficult to Build if You Don’t Already Have it
A lot of people believe that you must go into debt to build credit. They also believe that it’s difficult to build credit. You don’t need to do the former, and the latter isn’t true.
It does take time to build credit, but it’s not difficult. Some easy ways to start building credit is to see if your utility provider or landlord reports payments. If not, any kind of regular payments sends signals to build a good credit score.
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I’m John Schmoll, a former stockbroker, MBA-grad, published finance writer, and founder of Frugal Rules.
As a veteran of the financial services industry, I’ve worked as a mutual fund administrator, banker, and stockbroker and was Series 7 and 63-licensed, but I left all that behind in 2012 to help people learn how to manage their money.
My goal is to help you gain the knowledge you need to become financially independent with personally-tested financial tools and money-saving solutions.
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