Understanding Credit Scores: Myths vs. Facts

Understanding Credit Scores: Myths vs. Facts

Credit scores play a crucial role in our financial lives, yet they are often misunderstood. These scores can affect everything from loan approvals to interest rates, making it important to separate fact from fiction.

Myth 1: Checking Your Credit Score Hurts It

One common myth is that checking your own credit score will lower it. In reality, checking your credit score is considered a "soft inquiry" and does not affect your score. It's actually a good practice to regularly review your credit report for accuracy.

Hard inquiries, on the other hand, occur when lenders check your credit for loan applications. These can impact your score, but typically only by a few points.

Myth 2: Closing Old Credit Cards Will Improve Your Score

Another misconception is that closing old credit card accounts will boost your credit score. Closing an account can actually hurt your score by reducing your available credit and shortening your credit history, both of which are factors in determining your score.

Fact: Payment History is Key

The most significant factor in your credit score is your payment history. Consistently paying your bills on time can have a positive impact on your score. Late payments, on the other hand, can significantly lower it.

Setting up automatic payments or reminders can help ensure you never miss a due date, thereby maintaining a strong payment history.

Myth 3: You Only Have One Credit Score

Many people believe they have a single credit score, but in reality, you have multiple scores. Different credit bureaus and lenders may use various scoring models, resulting in different scores. It's important to focus on the general range rather than an exact number.

Fact: High Balances on Credit Cards Can Lower Your Score

Carrying high balances on your credit cards can negatively impact your credit utilization ratio, which is a significant factor in your credit score. Aim to keep your credit utilization below 30% to maintain a healthy score.

Paying down balances and avoiding maxing out your cards can help improve this aspect of your credit score.

Myth 4: Paying Off Debt Erases It from Your History

While paying off debt is a positive step, it doesn't erase it from your credit history. Accounts in good standing remain on your report for up to ten years, while negative information like late payments can stay for seven years.

Understanding this can help set realistic expectations about how quickly your credit score may improve after paying off debt.