What Are the Most Common Credit Score Myths?

There are many myths surrounding credit scores that can mislead consumers and affect their financial decisions. Understanding the truth behind these misconceptions is essential for maintaining good credit health and making informed financial choices.

Common Credit Score Myths

1. Myth: Checking Your Own Credit Score Hurts Your Credit

   Fact: Checking your own credit score is considered a soft inquiry and does not impact your credit score. Only hard inquiries, such as those made by lenders when you apply for credit, can temporarily lower your score.

2. Myth: Closing Old Credit Accounts Improves Your Score

   Fact: Closing old accounts can actually hurt your score. It reduces your overall available credit and can increase your credit utilization ratio, which can negatively impact your score. The length of your credit history also plays a role in your credit score, so keeping old accounts open may benefit you.

3. Myth: Carrying a Small Balance on Your Credit Card Helps Your Score

   Fact: Carrying a balance on your credit card is not necessary to build your credit score. In fact, it's best to pay off your balances in full each month. Credit scores are impacted more by timely payments and your credit utilization rate (how much credit you're using compared to your available credit).

4. Myth: Paying Off a Debt Removes It from Your Credit Report

   Fact: Even if you pay off a debt, it may remain on your credit report for several years. Negative marks, such as late payments or defaults, can stay on your report for up to 7 years, but paying off a debt can show that you’ve resolved the issue, which may have a positive impact over time.

5. Myth: A Higher Income Means a Better Credit Score

   Fact: Your income does not directly affect your credit score. Credit scores are based on your credit history, including your payment history, amounts owed, credit utilization, and the length of your credit history. Income is considered by lenders when assessing your ability to repay debt, but not when calculating your score.

6. Myth: All Credit Scores Are the Same

   Fact: There are several types of credit scores (e.g., FICO Score, VantageScore), and they can vary slightly based on the scoring model used by the credit bureau. However, the factors that determine your score are similar across most models: payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries.

7. Myth: Paying Off a Collection Automatically Removes It from Your Credit Report

   Fact: Paying off a collection debt does not automatically remove it from your credit report. It may show as paid or settled, but the negative mark will likely remain for up to seven years. It’s important to negotiate with creditors to ensure that the account is marked as paid in full or settled and inquire about the possibility of removing the account altogether as part of the settlement agreement.

8. Myth: You Only Have One Credit Score

   Fact: You actually have multiple credit scores, because different scoring models may calculate your score in different ways. For example, FICO scores and VantageScores use different algorithms, and each of the three major credit bureaus (Equifax, Experian, and TransUnion) may have slightly different data, which can result in variations in your score.

How to Avoid These Myths and Manage Your Credit Score

• Regularly Monitor Your Credit Reports: It’s essential to check your credit reports periodically (for free once a year at AnnualCreditReport.com) to ensure accuracy and spot any fraudulent activity early.
• Pay Bills on Time: Payment history is the most important factor in your credit score, accounting for about 35% of your FICO score. Always aim to make at least the minimum payment on time.
• Keep Credit Utilization Low: Try to keep your credit card balances below 30% of your available credit to improve your score.
• Avoid Unnecessary Hard Inquiries: Limit the number of credit applications you submit, as each hard inquiry can slightly lower your score.
• Educate Yourself on Credit Scoring Models: Understand the scoring models being used when your credit is checked, so you can better manage your credit across different platforms.

Example

A consumer might believe that carrying a balance on their credit card helps improve their credit score. However, if they regularly carry a balance and only make minimum payments, their credit utilization ratio will increase, which could lower their score. Instead, paying off the balance in full each month and keeping the utilization below 30% will help maintain a strong credit score over time.