When it comes to credit, there are many myths and misconceptions that can lead to confusion and financial mistakes. It’s important to separate fact from fiction in order to make informed decisions about your credit. In this article, we will debunk some common credit myths and provide research-based insights to help you better understand how credit works.
Myth 1: Checking your credit score will lower it
One of the most common credit myths is that checking your credit score will lower it. This is simply not true. When you check your own credit score, it is considered a “soft inquiry” and does not have any impact on your credit score. Only “hard inquiries” made by lenders when you apply for credit can potentially lower your score, and even then, the impact is usually minimal and temporary.
Research has shown that there is no significant correlation between checking your credit score and a decrease in credit score. In fact, regularly monitoring your credit score can be beneficial as it allows you to keep track of your financial health and identify any errors or fraudulent activity.
Myth 2: Closing a credit card will improve your credit score
Another common credit myth is that closing a credit card will improve your credit score. In reality, closing a credit card can actually have a negative impact on your credit score, especially if it is one of your oldest accounts or if it has a high credit limit.
Research has shown that the length of your credit history and your credit utilization ratio are important factors in determining your credit score. Closing a credit card can shorten your credit history and increase your credit utilization ratio, both of which can lower your credit score.
Instead of closing a credit card, consider keeping it open and using it responsibly. This can help improve your credit score over time by demonstrating a long credit history and low credit utilization.
Myth 3: Carrying a balance on your credit card will improve your credit score
Contrary to popular belief, carrying a balance on your credit card does not improve your credit score. In fact, it can actually hurt your credit score by increasing your credit utilization ratio.
Your credit utilization ratio is the amount of credit you are using compared to your total credit limit. It is recommended to keep your credit utilization ratio below 30% to maintain a good credit score. Carrying a balance on your credit card can increase your credit utilization ratio and potentially lower your credit score.
Research has shown that paying off your credit card balance in full each month is the best way to maintain a good credit score. This demonstrates responsible credit management and shows lenders that you can handle credit responsibly.
Myth 4: Closing old accounts will remove them from your credit report
Many people believe that closing old accounts will remove them from their credit report. However, this is not the case. Closed accounts, especially those with a positive payment history, can remain on your credit report for up to 10 years.
Research has shown that the length of your credit history is an important factor in determining your credit score. Closing old accounts can shorten your credit history and potentially lower your credit score.
Instead of closing old accounts, consider keeping them open and using them occasionally to keep them active. This can help maintain a long credit history and improve your credit score over time.
Myth 5: Paying off a collection account will remove it from your credit report
Many people believe that paying off a collection account will automatically remove it from their credit report. However, this is not always the case. While paying off a collection account is a positive step, it does not guarantee its removal from your credit report.
Research has shown that collection accounts can remain on your credit report for up to seven years, even after they have been paid off. However, some credit scoring models may weigh paid collection accounts less heavily than unpaid ones.
If you have a collection account on your credit report, it is important to address it and work towards resolving it. This can help improve your credit score over time, but it may take several years for the negative impact to diminish.
Summary
Understanding the truth behind credit myths is essential for making informed financial decisions. Checking your credit score, keeping old accounts open, paying off credit card balances, and addressing collection accounts are all important steps in managing your credit effectively.
By debunking these credit myths and providing research-based insights, we hope to empower you to take control of your credit and make informed decisions that will benefit your financial future.
Remember, credit is a tool that can be used to your advantage when managed responsibly. By staying informed and understanding how credit works, you can build a strong credit history and achieve your financial goals.