Common Credit Myths
Unfortunately, there is a lot of misinformation when it comes to credit scores, credit cards, and best credit practices. We’re here to clear things up and debunk these common credit myths so you can ensure you’re using credit responsibly.
Checking Your Credit Lowers Your Score
Checking your credit report won’t lower your credit score. In fact, it actually helps you. Reviewing your credit report is one of the best ways to protect your credit and your identity. Your credit report shows all of the financial accounts that are open in your name. If you see any unknown accounts on your report, it may mean your identity has been stolen. Report any unknown accounts or other errors on your credit report to the credit bureaus to have them removed or corrected. Removing fraudulent accounts and correcting errors can significantly improve your credit. You are entitled to one free credit report every year from Annual Credit Report so you can stay on top of your credit.
Credit Score and FICO® Score Are Different
A FICO® score is just one of the different types of credit scores, and FICO® is actually the most common credit scoring model. The different systems may employ a different range, although most scoring models range from 300 to 850, but the biggest different tends to be in the unique algorithm used to calculate the factors that are scored to compile your overall credit score.
Getting a Credit Card Lowers Your Credit Score
Lenders need clues about your money management abilities. If you don’t have much credit activity, lenders don’t have much information to base their decision on, and they may not be confident in your ability to manage debt. If you don’t already have a credit card and you get one, it can actually increase your credit score after a few months of credit use. If you already have a credit card and open a new one, your score may dip down slightly right when you get the new card since opening new accounts is a hard inquiry on your credit, but your credit score should bounce right back and can even improve.
Credit Cards Lead to Debt
If you max out your credit cards and have no repayment plan in place, you can end up owing way more money than you’ll be able to easily repay. However, responsible use of your credit cards can help you build credit. If you are faced with a large unforeseen expense, like an expensive repair, paying for it with a credit card can help you out of a tricky situation. As long as you make regular on-time payments to pay off your balance, your credit score won’t take a major blow. Making your payments on time establishes your credit history as a responsible credit user.
Late Payments Don’t Hurt Your Credit
Any time you borrow money, either through a credit card or another type of loan, your repayment history is reported to the credit bureaus. Late or missed payments will show on your credit report, and will lower your credit score. Making regular on-time payments is the best way to raise your credit score.
Carrying a Balance Helps Your Credit
Using your credit cards regularly will help improve your score, but that doesn’t mean you have to carry a balance. The higher your credit card balance, the more you will have to pay in interest, so it’s best to either pay your balance in full each month, or at least keep it as low as you can. Making your payments on time each month is what helps your score the most, whether you make the minimum payment or pay the balance off in full.
Having More than One Card Hurts Your Credit
Having multiple credit cards won’t lower your credit score, as long as you don’t open too many new credit accounts in a short time frame. Remember that opening a new credit account is a hard inquiry which can temporarily drop your score, but it typically bounces back quickly as long as you maintain responsible use on your new account. Having more than one credit card may even help improve your credit utilization ratio.
It’s Best to Close Old Accounts Before Opening a New One
Since having multiple cards doesn’t hurt your credit score, there’s no need to close an existing account before you open a new one. Closing your oldest credit accounts can actually damage your credit. An older credit account indicates a longer credit history, and a long history of on-time payments is the best way to represent your responsibility as a borrower. This makes credit lenders more likely to work with you, so you should only close your oldest credit accounts if you no longer need them.
You Can’t Change Your Interest Rate
The interest rate you receive on your credit card is based on a number of variables, including the current rates, your credit score, and your credit history. If your credit has improved since you originally applied for the account, you may be eligible for a lower rate. It doesn’t hurt to contact your credit lender and determine if you qualify for a reduced interest rate.
Higher Credit Limits Hurt Your Score
Unless having a higher limit will cause you to spend more than you can repay, it could actually help your score. An increased credit limit will improve your credit utilization ratio, which is the second most influential factor in calculating your credit score.
Prepaid Cards Help Improve Your Credit
Prepaid cards can be convenient to use, but they unfortunately have no influence on your credit score. A prepaid debit card is most similar to using cash, just in card form. The card can only access the funds that are already loaded onto it. Since prepaid cards aren’t linked to any accounts or line of credit, they can’t help you with boosting your credit score and have zero impact on your credit report.
An Authorized Card User Won’t Affect Your Credit
If you have added an authorized user on your credit card, that user will appear on all credit reports. Their activity can either help or hurt your score. If they rack up the credit card balance or make late payments, it can negatively impact your credit score.
It’s Impossible to Have a Perfect Credit Score
Though it is possible, it’s not necessary to strive for a perfect credit score. When you already have a high enough score, there isn’t much added benefit to increasing your score even more. Plus, credit scores fluctuate pretty regularly as your activity fluctuates, so it would be quite difficult to maintain a perfect credit score even if you did manage to achieve it.
Your Income Affects Your Credit
Neither your income nor your employment history are factored into calculations for your credit score. The credit scoring models don’t take into consideration what your job is, it’s only used as identifying information on your credit report to ensure the report is matched to the right person.
A Bad Credit Score Is Forever
If you have less than ideal credit now, it’s not a permanent “bad grade” on your credit report. Thankfully, there are a number of ways you can work to improve your credit score. Keeping your balances in check and paying on time every month are the best ways to improve your credit. By building and maintaining good credit habits, over time you can work your way up to a great credit score.
Start building your credit today! We are committed to helping our members build good credit and keep it there. We make sure our credit cards work for you, which is why we offer the lowest rates possible, low to no fees, great perks through the Scorecard® Rewards Program, and convenient payment options to make sure you never miss a payment. Plus, eligible members can view their FICO® Score for free within Digital Banking so you can always stay on top of your score. View our rates and credit card agreement for more information, or apply online now or over the phone.
At Robins Financial Credit Union, our mission is to enhance the financial well-being of our members and community. We honor this commitment by providing educational content to help you make the most of your finances. Read our other blog articles to help you gain the financial knowledge you need to succeed.