If you find yourself confused by the circulating facts and myths surrounding credit scores, you’re not alone. It’s easy to get overwhelmed with questions about credit scores when you’re managing your finances or making a crucial financial decision. However, it’s important to get your facts straight so you can improve your financial health.
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12 common credit score myths
These are some of the most widely circulated myths you might have heard about your credit:
1. Your credit score will improve as your income increases
Your credit score doesn’t improve simply as a result of having a higher income.
Having a high income can help your loan eligibility and can help you manage your credit by staying out of debt. However, income doesn’t impact your credit score.
Why people believe this myth
People believe this for two reasons:
- It seems like it makes sense: Without knowing how credit scoring actually works, you might assume that your income is a factor that determines your credit score. But it isn’t.
- It’s easier to get loans with more income: It’s true that having a lower debt-to-income (DTI) ratio helps your chances of getting a loan. (A low DTI ratio means your monthly income is much greater than your total monthly payments towards your debts.) However, your DTI ratio doesn’t impact your credit score. You can have a great DTI ratio and a terrible credit score—and that bad credit score will hurt your loan eligibility.
What actually affects your credit score
How well you handle your credit affects your credit score, not the size of your income. FICO, for instance, calculates your score with the following five factors: 1
- Payment history (35%)
- Amounts owed/credit utilization (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
Note that income isn’t one of the factors.
2. Closing credit cards is good for your score
Canceling your credit card can actually damage your score, at least at first. When you cancel a credit card, it impacts some of the factors that the credit scoring models use to create your score.
Those factors include your:
- Credit utilization rate: This is the percentage of your total available credit that you’re currently using. The lower the rate, the better. Closing a credit card decreases the amount of available credit you have, leading to a higher credit utilization rate, which in turn will damage your credit score.
- Length of credit history: This is the average age of your credit accounts. The longer your credit history, the better. While closing an old credit account won’t affect your FICO credit score (until it falls off your credit report in 7-10 years), it may affect your VantageScore credit score.
When closing a card might help your score
If you’re having trouble making credit card payments, or are struggling to manage multiple cards, closing a credit card will help your score in the long run.
3. Applying for multiple credit cards simultaneously won’t hurt my credit score
Applying for a credit card will trigger a type of credit inquiry called a hard inquiry, which will hurt your score.
What is a credit inquiry?
There are two types of inquiries:
- Hard inquiry: This happens when a lender asks to check your credit report as they proceed with your loan or credit card application process. Hard inquiries usually take several points off your credit score, although they affect it for less than a year and fall off your report in around 2 years.
- Soft inquiry: This happens when someone checks your credit report for reasons other than a credit application (e.g., you viewing your own report, a prospective employer checking them as part of a background check, etc). A soft inquiry will appear on your report but won’t affect your score.
Triggering one or two hard inquiries a year typically won’t have a significant negative impact on your credit score. However, having multiple hard inquiries within a short period of time may suggest to a lender that you’re short of money and are desperate to secure a line of credit. They may thus deem you to be a high-risk borrower.
Why people believe this myth
In the FICO scoring model, there are certain types of loans for which multiple applications, if requested within a short period of time, will only count as one inquiry. These loans include:
- Home mortgages
- Auto loans
- Personal loans
This is because it’s considered natural that buyers of a new home or car would want to look at different options before making a final decision. Unfortunately, you can’t group applications when applying for credit cards because they’re merely requests for unsecured loans.
4. Checking my own credit score will hurt my score
When you check your own credit score, it only requires a soft inquiry, which doesn’t affect your score.
5. My credit score is good as long as I don’t have any credit card debt
You can have no credit card debt and still have horrible credit. For instance, if you take out loans that you don’t repay, you’ll cause severe damage to your credit score. If you have no loans and no credit cards, you won’t even have a credit score to begin with.
Credit card debt isn’t inherently bad. It’s only harmful if you don’t make payments on time, and helpful to your credit score if you do.
Getting a simple credit card and making on-time payments is the fastest way to build up your payment history and generate a good credit score. 3
6. Not using a credit card will lower my score
For this tip, we assume that you have a credit card, but you just aren’t using it.
Some people believe that not using your credit card for months (and carrying a $0 balance on it) can hurt your credit score. But that’s false. You don’t need to continually use your credit card (and pay it off) to prevent damage to your credit score.
When not using a credit card lowers your score
If you don’t use your credit card for a very long time, your issuer may eventually close your account due to inactivity.
As discussed earlier, closing your credit card will hurt your credit utilization, and may hurt the length of your credit history in certain scoring models. Provided you can afford the card, it’s best to maintain a minimal amount of activity on it.
7. Getting married will result in a joint credit score
Marriage doesn’t automatically merge your score with your spouse. In fact, joint credit scores don’t actually exist. A credit score is specific to one person only. However, marriage can affect your credit score and your future credit applications in other, less direct ways, and divorce can affect your credit too.
How your marriage affects credit account applications
If you apply for a joint account with your spouse, both of your credit scores will be evaluated by lenders. So if your husband has a bad credit score, but you have an excellent one, you may still be rejected.
If you successfully open a joint loan, your lender will report both you and your spouse’s activity on both of your credit reports. So if your wife forgets to pay the credit card bill, her nonpayment will show up on your credit report and hurt your credit score, too, and vice versa.
8. Co-signing for a loan or credit card won’t affect your credit score
The act of co-signing a loan won’t affect your credit. However, your credit score will be penalized if your co-signer misses a payment or if they exceed their limit. It’s safer to learn more about co-signing a loan before committing to one. 4
9. Student loans don’t affect my credit score
Student loans affect your credit score, most significantly by contributing to your payment history (positively or negatively).
You need to pay all of your bills on time to establish a good credit score. These include:
- Student loans
- Car loans
- Medical bills
- Credit card debt
Moreover, having a student loan is good for your credit mix, which can boost your score.
Why people believe this myth
Student loans are special because you don’t need to start paying them back immediately. This means that some of their effects on your credit are delayed, which can potentially lead people to believe they don’t affect your credit at all.
However, once you enter your student loan’s repayment period, it will affect your score just as any other loan would.
10. Paying off my loan early will help my credit score
Completely paying off an installment loan of any type (e.g., auto loan, personal loan, mortgage, etc) will result in the account closing, slightly hurting your score.
Why does paying a loan off early hurt my score?
Paying a loan off early hurts your score because, while a closed account with a good payment history still has a positive effect on your score up to 10 years, it has less of an impact than a responsibly used active account. In addition, your credit mix, which helps your score, will also take a hit when your account is closed. 5
Note that despite this, it can still be worth paying off a loan early if it will benefit your finances in other ways, such as by saving money on interest payments. The overall hit to your credit will be slight, and in a few months your score will bounce back. 5
11. Carrying a balance on my credit card helps my credit score
Carrying a balance on your credit card can lower your score by raising your credit utilization rate, which is the percentage of your available credit that you’re using. The lower your credit utilization rate, the better.
Keeping an active balance on your card also means you’ll have to pay interest, costing you more money. It’s a good idea to use your card regularly to keep the credit account from closing, but you should pay your balance in full every month if possible. In fact, paying your credit card early can help your credit score.
12. Paying only in cash is the best thing I can do to help my credit score
It’s true that going cash-only will prevent you from missing any payments on your credit accounts, which will protect your credit score from damage. However, to actively improve your credit score, you need to use your credit.
The best thing you can do to help your credit score is to make regular, modest-sized purchases and take care to always pay your bills on time.
Other facts and myths about credit
There are a lot of other myths about credit out there. In the rest of this article, we’ll break them down and go over what’s true and what’s not.
13. Not having a credit card will hurt my score
If you have a credit history that only features installment loans (which is possible if, for instance, you’re young and your only credit account is a student loan), not having a credit card will hurt your credit mix. Credit mix is a credit scoring factor that judges how many types of credit accounts you have.
Having only loans (or only revolving credit accounts, like credit cards) hurts your credit mix and therefore your score, although not very much (credit mix only accounts for 10% of your FICO score, making it one of the least important scoring factors).
When it can’t hurt your score
If you don’t have any credit history at all (meaning you have no loans, credit cards, etc.), not having a credit card can’t hurt your credit score. That’s because without a credit history, you can’t be assigned a credit score.
14. Paying off my debt improves my credit score
True and false (it depends).
When paying off debt helps your credit score
Paying off your credit card debt every month on time increases your score. Paying off late debts of all types also benefits your score (or at least prevents further damage to it).
When paying off debt hurts your credit score
As mentioned, paying off your installment debts, such as student or auto loans, can hurt your score because it closes the credit accounts.
That being said, you shouldn’t delay paying off your loans just for a few points, especially if they have high interest rates.
15. My employer can see my credit score
Your employer (whether current or prospective) can’t see your credit score, even if they perform a credit check. 8 This is because they’ll only receive a limited version of your credit report that doesn’t show your score.
It’s also worth noting that, according to the Fair Credit Reporting Act (FCRA), employers can’t run a credit check without having your written consent. 9
16. Using my debit card is good for my credit score
Debit cards are not a type of credit account; using one is basically the same as using cash, and has no impact on your credit score at all.
17. Choosing ‘credit’ when using my debit card will improve my credit score
Confusingly, selecting “credit” when you swipe your debit card doesn’t actually let you use your debit card like a credit card. You’re still withdrawing money directly from your checking account, which means you’re not using a line of credit and your payment won’t be reported to the credit bureaus. This means it won’t affect your credit score.
What does select “credit” actually do?
Selecting the “credit” button on a debit card doesn’t do very much at all. The main difference is in how you finalize the transaction—by signing your name (if you selected credit) or punching in your PIN (if you selected debit).
Your choice may potentially have several small effects. For instance, if your debit card is sponsored by a credit card network, such as Visa or MasterCard, hitting the credit button and signing for your purchase may trigger certain fraud protections that the network normally applies to genuine credit card transactions.
However, these effects are fairly marginal. Overall, the credit and debit buttons aren’t significantly different, and which one you choose has no implications for your credit score.
18. Settling my debt improves my credit score
True and false (it depends).
Settled debts appear on your credit report and damage your credit score, although not as much as other negative marks, such as unpaid collection accounts. 10
This means that the ultimate impact that debt settlement has on your credit score depends on your situation.
- When settled debts hurt your score: If you could have paid off your debt in full but instead chose to settle it, then the net result will be negative. This is because the credit scoring models want to incentivize people to pay their debts.
- When settled debts help your score: When you have no realistic prospect of paying a debt off and opt to settle it, your score will still suffer, but it won’t be as badly hurt as it would have been if you continued to incur other negative marks, such as further late payments or a charge-off. Relative to the alternative, you can regard the net impact as positive.
19. Taking out a mortgage will hurt my credit score
A mortgage application requires a hard inquiry, which will lower your score temporarily. Your new loan will also lower the average age of your credit accounts, knocking a few points off your score.
However, the damage shouldn’t be significant, and by making on-time payments, you can improve your score over time. Having a mortgage, which is a type of installment loan, is also beneficial to your credit mix.
20. You can’t get a credit card with a bad score
There are credit card options for bad credit. However, since your poor credit score suggests that you’re a high-risk lender, your options may be limited.
In particular, you’re more likely to qualify for:
- Credit cards with few (or no) rewards, such as cash back or airline miles
- Cards with relatively high interest rates
- Secured credit cards (i.e., a type of credit card that requires a security deposit as collateral)
21. When I max out my credit card, my credit score won’t be affected
Maxing out your credit card increases your credit utilization rate, which lowers your credit score.
Ideally, you want to keep your credit utilization rate below 30%, and in the single digits if you can. When you max out your cards or overuse them in general, it signifies to lenders that you may be financially unstable.
22. Credit reporting agencies (CRAs) all use the same scoring models
Although the three main CRAs all use the same VantageScore model, they have their own versions of the FICO model which work slightly differently.
Moreover, even if the CRAs used the exact same credit scoring model to produce your score, you would probably receive a different score from each agency anyway. That’s because the details on your credit report may differ between them.
For instance, let’s say your credit card issuer only reports to one agency, but your auto lender reports to all three. Because your credit history differs in each report, your score will as well (but likely not by much).
23. It is impossible to improve my credit score
There are many actions that you can take to improve your credit score. The easiest way is to pay off your debts and make consistent on-time payments in the future.
24. There’s a quick fix for bad credit
Generally, repairing a terrible credit score will take some time—from a few months to several years, depending on how serious the damage is.
When you can fix your credit quickly
If you’re the victim of identity theft or serious credit reporting mistakes, you can get incorrect and fraudulent entries removed from your credit report by disputing them with the credit bureaus.
The dispute process shouldn’t take more than a month or two, which is considered a quick fix in the world of credit scoring.
25. I need to pay to obtain my credit report
You can get a free credit report from one of the three main credit bureaus (Equifax, Experian, and TransUnion) every 12 months. You can order it online from AnnualCreditReport.com. AnnualCreditReport is safe to use, and is actually federally authorized to provide your reports. 11
When you need to pay to get your credit report
If you get your credit report from another service, it’s possible they’ll try to charge you money for it. Also, in general, you have to pay if you want to get more than one credit report per year, although the credit bureaus are offering one free report per week until the end of 2022, due to the COVID-19 pandemic.
26. Banks will be more willing to lend to me if I’ve never taken any credit in the past
Without an active credit account and a payment history, potential lenders don’t have any data to determine if it’s risky to give you a loan. Many lenders won’t approve loan applications for such borrowers, citing an insufficient credit history.
27. After obtaining a credit card, the interest rate won’t change
The interest rate on almost any credit card can change. However, there may be some restrictions on how this can happen, depending on whether you have a “fixed rate” or “variable rate” card.
- Fixed rate credit cards: If you have one of these, your interest rate can only change based on your actions. For instance, if you have a good payment history and you request a lower interest rate, your card issuer might be willing to consider it. On the other hand, if you’re very late paying your bills, they might penalize you by raising your interest rate. If they do, they’re legally required to give you 45 days of notice. 12
- Variable rate credit cards: The interest rate on these cards can change without warning, depending on the state of the economy and other factors. Your card issuer isn’t required to notify you when this happens.
As you’d expect, interest rates on fixed rate credit cards tend to be much more stable, but it’s important to be aware that both types of cards can change. You’re never guaranteed to be “locked in” at your original interest rate.
28. Credit cards with higher limits are bad for my credit score
Increasing your credit limit can lower your credit utilization rate and thereby help your score, provided that you maintain the same spending habits and continue making on-time payments. A higher credit limit is only bad if it encourages you to carelessly overspend.
29. My credit score doesn’t really matter in the real world
Having a good credit score isn’t just a source of pride; it has actual effects on your day-to-day life. For instance, a bad credit score can hold you back from:
- Buying a house
- Buying a car
- Securing a personal loan
- Getting a credit card
- Getting a lower interest rate on loans
- Renting an apartment
Some prospective employers may even check your credit report during the hiring process to assess your reliability. (As mentioned, they can’t see your score itself, but they can see the items that created it.) In short, building a good credit score will make your life easier.
30. I don’t need to worry about my credit score until I’m older
You should start caring about your score once you turn 18, which is the minimum age that you can apply for credit. The length of your credit history is an important factor in establishing a good score, so you should start building your credit as early as possible.
31. Changing my address will affect my credit score
Changing your address won’t hurt your credit score. However, if you’re looking to rent an apartment, the apartment management company may request a credit check to see how well you handle your finances. This may result in a hard inquiry, knocking a few points off your score, although landlords and property management companies will more commonly perform a soft inquiry, which will have no effect.
32. Unpaid parking tickets will affect my credit score
Unpaid parking tickets don’t affect your credit score just by existing. Parking tickets are a matter of public record, but the three main credit bureaus, Equifax, Experian, and TransUnion, don’t include public records in your credit report, except for bankruptcy.
When parking tickets will affect your credit score
If your unpaid parking ticket gets sent to a debt collection agency, it may affect your credit score. While modern credit scoring models don’t count unpaid debts that were originally under $100 (as many parking tickets are), many lenders use older scoring models. 13
Regardless of the scoring model used, if an unpaid parking ticket that exceeds $100 gets sent to a collection agency, it may affect your score.
33. Library fines will affect my credit score
Libraries don’t report fines to credit bureaus, meaning that late return library fees won’t show up on your credit report. Unlike parking tickets, it’s also unlikely that the library will send your account to collections because the fines are low, so it’s not worth the hassle. All of this means that library fines (whether paid or unpaid) won’t affect your credit score.