Your credit score is one of the most important numbers in your financial life, influencing everything from loan approvals to interest rates. Yet, despite its significance, many people believe common myths about what affects their score. Misinformation can lead to poor financial decisions, so let’s debunk these myths and uncover the truth about what really impacts your credit score.
Myth 1: Checking Your Credit Score Lowers It
One of the most persistent myths is that checking your credit score will hurt it. This simply isn’t true. There are two types of credit inquiries: hard inquiries and soft inquiries.
- Hard inquiries occur when a lender checks your credit for a loan or credit card application. These can slightly lower your score, but the impact is usually minimal and temporary.
- Soft inquiries happen when you check your own credit or when a company pre-approves you for an offer. These do not affect your score at all.
Regularly monitoring your credit is a smart financial habit and won’t harm your score. In fact, it helps you catch errors or signs of fraud early.
Myth 2: Closing Old Credit Cards Improves Your Score
Many people believe that closing old or unused credit cards will boost their credit score. However, this can actually have the opposite effect. Here’s why:
- Credit utilization ratio: Closing a card reduces your available credit, which can increase your credit utilization ratio (the amount of credit you’re using compared to your total limit). A higher ratio can lower your score.
- Length of credit history: Older accounts contribute to a longer credit history, which is beneficial for your score. Closing an old account shortens your average credit age.
Unless a card has high fees, it’s often better to keep it open and use it occasionally to maintain activity.
Myth 3: Carrying a Small Balance Helps Your Score
Some people think carrying a small balance on their credit cards helps their score by showing they’re actively using credit. This is a dangerous misconception. Here’s the truth:
- Paying in full is best: Paying your balance in full each month demonstrates responsible credit use without incurring interest charges.
- Interest hurts: Carrying a balance means paying interest, which costs you money and doesn’t benefit your score.
The key is to use your credit card regularly but pay it off completely to avoid unnecessary debt.
Myth 4: Income Affects Your Credit Score
Your income is not a factor in your credit score. Credit bureaus don’t track how much you earn, so a high salary won’t boost your score, and a low income won’t hurt it. However, income can indirectly influence your credit in these ways:
- Debt-to-income ratio: Lenders may consider your income when approving loans, but this isn’t part of your credit score calculation.
- Credit limits: Higher incomes may qualify you for higher credit limits, which can improve your credit utilization ratio.
Focus on managing your credit responsibly, regardless of your income level.
Myth 5: All Debt Is Bad for Your Credit Score
Not all debt is created equal. While excessive debt can harm your score, some types of debt can actually help when managed properly. Here’s how:
- Installment loans: Mortgages, auto loans, and student loans can positively impact your score if you make timely payments.
- Credit mix: Having a variety of credit types (e.g., revolving credit like cards and installment loans) can slightly improve your score.
The key is to borrow responsibly and avoid missing payments or maxing out credit cards.
Conclusion
Understanding what truly affects your credit score is essential for making smart financial decisions. Debunking these myths helps you focus on the factors that matter: payment history, credit utilization, length of credit history, and responsible borrowing. By staying informed and managing your credit wisely, you can build and maintain a strong credit score that opens doors to better financial opportunities.