Financial Wellness
Misleading Credit Score Myths
Your credit score significantly impacts your financial life. Creditors use it to decide on loan approvals and interest rates. Landlords, insurers, and even employers may check it, too. A good score can help you achieve goals faster and more affordably.
We explored credit scores in detail in this previous TowerLine article.
Many misconceptions continue to surround credit scores, leading to potential financial missteps. Let's explore some common credit score myths and uncover the truth behind them.
By regularly monitoring your credit, you can:
The best way to improve your credit score is to pay off your balance in full each month.
This myth sticks around because people often confuse credit scoring factors. What really matters is keeping your balance low compared to your credit limit—aim for under 30%. Regular, on-time payments and using credit responsibly are the key to building a strong credit score.
Consider using the card occasionally to prevent the issuer from closing it due to inactivity.
While there's a link between higher income and higher credit scores, it's because higher earners often have lower credit utilization and make payments on time—both of which help boost credit scores. But don't worry if you have a lower income; you can still achieve a great credit score by managing your credit responsibly. On the other hand, even high earners can end up with poor credit if they don't handle their debt properly.
Many misconceptions continue to surround credit scores, leading to potential financial missteps. Let's explore some common credit score myths and uncover the truth behind them.
Myth 1: Checking Your Credit Score Hurts It
Contrary to popular belief, checking your own credit score is considered a "soft inquiry" and doesn't negatively impact your score. In fact, regularly monitoring your score is a smart way to stay on top of your financial health.By regularly monitoring your credit, you can:
- Catch signs of identity theft early by spotting unusual activity or new accounts.
- Spot and correct mistakes on your credit report.
- See how your financial habits affect your score.
- Take action to improve your credit health.
*The credit scores provided are based on the VantageScore® 3.0 model. Lenders use a variety of credit scores and are likely to use a credit score different from VantageScore® 3.0 to assess your creditworthiness.
Myth 2: You Must Have a Credit Card to Build Credit
You don't need your own credit card to build credit; becoming an authorized user on someone else's account can help. As an authorized user, you benefit from the primary cardholder's positive payment history and credit utilization without needing to use the card yourself. However, if the primary cardholder misses payments or carries high balances, it could hurt your credit score. Also keep in mind that not all credit card issuers report authorized user activity, so be sure to check this before becoming an authorized user.Myth 3: Carrying a Balance Improves Your Score
Carrying a balance on your credit card doesn't help your score. It only leads to unnecessary interest charges. In fact, it can harm your credit score by increasing your credit utilization ratio.The best way to improve your credit score is to pay off your balance in full each month.
This myth sticks around because people often confuse credit scoring factors. What really matters is keeping your balance low compared to your credit limit—aim for under 30%. Regular, on-time payments and using credit responsibly are the key to building a strong credit score.
Myth 4: Closing Unused Credit Cards Boosts Your Score
Surprisingly, closing a credit card account can potentially harm your score. It reduces your available credit, which may increase your credit utilization ratio. Closing an old card also shortens your credit history, which negatively impacts your score as well. Unless the card has an annual fee, it's often better to keep it open.Consider using the card occasionally to prevent the issuer from closing it due to inactivity.
Myth 5: Higher Income Means a Higher Credit Score
Your income doesn't directly impact your credit score. What matters most is how you manage your debts, not how much you earn.While there's a link between higher income and higher credit scores, it's because higher earners often have lower credit utilization and make payments on time—both of which help boost credit scores. But don't worry if you have a lower income; you can still achieve a great credit score by managing your credit responsibly. On the other hand, even high earners can end up with poor credit if they don't handle their debt properly.
Myth 6: Co-signing Doesn't Affect Your Credit
Co-signing a loan can have a big effect on your credit. As a co-signer, the loan shows up on your credit report, and you're equally responsible for the debt. If the primary borrower misses payments, it can damage your credit. Plus, the loan will increase your debt-to-income ratio, which could affect your ability to get credit in the future. Even if payments are on time, the hard inquiry when applying for the loan can temporarily lower your score. However, if the borrower consistently makes on-time payments, co-signing could improve your credit.A solid credit record and an accurate credit report are valuable assets
For additional resources to help manage and protect your credit, visit Calculators.
Conclusion
By understanding these credit score myths, you can make smarter decisions about your financial health. The key to a good credit score is developing healthy habits, like paying bills on time and keeping your credit utilization in check.Resources: Lending Club, Credit.com ™, LLC.
