Building credit is an important part of your overall financial picture. And, because it’s so important, that means there is a lot of false information floating around. Here are the three most common myths about credit scores and the facts to trust instead.
1. MYTH: Paying interest on a revolving balance increases your credit score.
FACT: The factor that contributes most to your credit score is making payments on time. Let’s say your payment is due on the 15th of the month. If you pay the whole balance on the 15th, or just the minimum payment on the 15th, the result is the same in the eyes of the credit bureau. They both count as on-time payments and contribute positively from a payment history standpoint to your credit score.
However, that doesn’t mean the result in your wallet is the same. Paying the minimum payment on your credit cards means you’ll pay interest on the remaining balance every month until it is paid in full.
2. MYTH: Closing old credit accounts helps your score.
FACT: Closing old credit accounts can hurt your score. When credit bureaus calculate your score, they look at how much credit you’re using compared to how much available credit you have. They do this per account, but also as an average of all accounts you might have. This is called your “credit utilization ratio.” If you have a lot of credit available, but don’t use much of it, that’s green flag behavior. Credit bureaus view it favorably and it boosts your score.
Now, let’s think about what happens when you close an account. You have now decreased your amount of available credit. Even if you continue to use the same amount of your other lines of credit, your overall credit utilization has suddenly increased because you have less available. A closed account can also reduce the average age of your accounts over time, so think twice before closing an account, especially one you’ve used for a while.
3. MYTH: Checking your own credit and shopping around for rates hurts your score.
FACT: Checking your own credit does not affect your score. In fact, you should check it regularly. This myth comes from a misconception about the difference between lenders and borrowers. When you visit a lender, and they pull your credit during the loan approval process, that counts as a “hard pull” and has an impact on your credit score. (The exact impact depends on the overall health of your credit profile.) Alternatively, checking your own credit counts as a “soft pull” and does not impact your score.
When it comes to rate shopping, visiting a few different lenders does not impact your credit score. Depending on the credit scoring model being used, borrowers have a 14 to 45 day window to shop for rates. This means you could apply for a car loan on day one with Lender A, day four with Lender B and day 10 with Lender C, and your credit score would only be hit with one hard inquiry.
All in all, credit doesn’t have to be complicated! Visit annualcreditreport.com to check your credit report and use our debt payoff calculators to determine how much you’ll need to save to reach your debt payoff goal.
