Common Credit Myths and Misconceptions Debunked

When it comes to managing credit, there's a lot of misinformation out there. Many people rely on word of mouth or outdated advice, which can lead to costly mistakes. Let’s set the record straight by debunking some of the most common myths and misconceptions about credit.

Myth 1: Checking Your Credit Report Will Lower Your Credit Score

One of the most persistent myths is that checking your own credit report will harm your score. The truth is, checking your own credit is considered a soft inquiry, which does not impact your credit score. In fact, regularly reviewing your credit report is a smart practice. It helps you stay informed about your credit status and catch any errors or signs of identity theft early. The type of inquiry that can affect your credit score is a hard inquiry, which occurs when a lender checks your credit to make a lending decision.

Myth 2: Closing Old Accounts Will Improve Your Credit Score

Many people believe that closing old credit accounts will help improve their credit score. However, closing a credit account can actually hurt your score in two ways. First, it can increase your credit utilization ratio, which is the amount of credit you're using compared to the total credit available to you. Second, closing an account can reduce the average age of your credit history, which is another factor that affects your score. It's usually better to keep old accounts open, especially if they have no annual fees and are in good standing.

Myth 3: Carrying a Small Balance on Your Credit Card is Good for Your Credit Score

There’s a common misconception that carrying a small balance on your credit card and paying interest helps build credit. In reality, carrying a balance and paying interest is not necessary for a good credit score. The best practice is to pay off your balance in full every month to avoid interest charges. What really helps your credit score is using your credit responsibly and keeping your credit utilization low, ideally below 9% of your total credit limit.

Myth 4: You Only Have One Credit Score

Contrary to popular belief, you don’t have just one credit score. There are multiple credit scoring models used by different lenders and credit bureaus. The two most common scoring models are FICO and VantageScore, and each can have variations based on the bureau reporting the score (Experian, Equifax, or TransUnion). This means your credit score can vary depending on which model or bureau is being used to pull your score.

Myth 5: All Debts Are Bad for Your Credit

Not all debts are created equal. While high-interest credit card debt can hurt your credit score if not managed properly, some debts, like a mortgage or student loans, can actually help build your credit if you make timely payments. These types of debts are considered “good debt” because they are associated with investments in your future, such as owning a home or getting an education. What matters most is your ability to manage debt responsibly and make payments on time.

Conclusion

Understanding how credit really works is essential for managing your finances effectively. Don’t let myths and misconceptions steer you in the wrong direction. Stay informed, manage your credit wisely, and always seek reliable sources of information. By debunking these common myths, you can take control of your credit and work towards achieving your financial goals with confidence.