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Credit Score Myths That Can Lead to Regret

A credit score is a three-digit number that represents an individual’s creditworthiness. It is a crucial factor that lenders consider when deciding whether to approve a loan or credit application. Unfortunately, there are several myths surrounding credit scores that can lead to regrettable financial decisions. These myths can mislead individuals and cause them to make mistakes that can negatively impact their credit scores and overall financial well-being. In this article, we will debunk some common credit score myths and provide valuable insights based on research and expert opinions.

Myth 1: Checking Your Credit Score Lowers It

One of the most prevalent credit score myths is the belief that checking your credit score will lower it. Many people avoid checking their credit scores because they fear that doing so will have a negative impact. However, this is far from the truth.

Research has shown that checking your own credit score, also known as a soft inquiry, does not affect your credit score at all. Soft inquiries are inquiries that are initiated by the individual for personal reasons, such as monitoring their credit or applying for pre-approved credit offers. They are not visible to lenders and have no impact on credit scores.

On the other hand, hard inquiries, which occur when a lender or creditor checks your credit as part of a loan or credit application, can have a small impact on your credit score. However, the impact is usually minimal and temporary. According to FICO, one hard inquiry typically has a minimal impact on a credit score, and multiple inquiries within a short period for the same type of credit are usually treated as a single inquiry.

Therefore, it is important to regularly check your credit score to stay informed about your financial health and identify any potential errors or fraudulent activity. Monitoring your credit score can help you take proactive steps to improve it and avoid any surprises when applying for credit.

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Myth 2: Closing Credit Cards Improves Your Credit Score

Another common credit score myth is the belief that closing credit cards can improve your credit score. Many individuals mistakenly think that closing unused or unwanted credit cards will boost their creditworthiness. However, this is not the case.

Closing a credit card can actually have a negative impact on your credit score, especially if it is one of your oldest credit accounts. The length of your credit history is an important factor in determining your credit score, and closing an old credit card can shorten your credit history, which may lower your score.

In addition, closing a credit card can also increase your credit utilization ratio, which is the percentage of your available credit that you are currently using. A higher credit utilization ratio can negatively impact your credit score. For example, if you have a total credit limit of $10,000 and a balance of $2,000, your credit utilization ratio is 20%. However, if you close a credit card with a $5,000 limit, your credit utilization ratio will increase to 40%, which can lower your credit score.

Instead of closing credit cards, it is generally recommended to keep them open, especially if they have no annual fees. Keeping your credit cards open and using them responsibly can help build a positive credit history and improve your credit score over time.

Myth 3: Carrying a Balance on Your Credit Card Boosts Your Credit Score

Many people believe that carrying a balance on their credit card and only making the minimum payment each month can help improve their credit score. This is a common credit score myth that can lead to unnecessary interest charges and financial stress.

In reality, carrying a balance on your credit card does not have a positive impact on your credit score. Your credit utilization ratio, which we discussed earlier, is a more important factor in determining your credit score. It is calculated by dividing your credit card balances by your credit limits. Carrying a high balance can increase your credit utilization ratio and potentially lower your credit score.

It is generally recommended to pay off your credit card balances in full each month to avoid interest charges and keep your credit utilization ratio low. This demonstrates responsible credit management and can help improve your credit score over time.

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Myth 4: Closing Old Debts Will Remove Them from Your Credit Report

Another credit score myth is the belief that closing old debts will remove them from your credit report. Many individuals mistakenly think that paying off and closing old debts will erase them from their credit history and improve their credit score. However, this is not the case.

When you close an old debt, such as a paid-off loan or credit card, it does not disappear from your credit report. The credit reporting agencies keep a record of your credit history for a certain period, typically seven to ten years, depending on the type of debt. Closed accounts, including paid-off debts, can remain on your credit report for several years.

While closing old debts does not remove them from your credit report, it can still have a positive impact on your credit score. Paying off and closing old debts demonstrates responsible financial behavior and can help improve your creditworthiness in the eyes of lenders.

It is important to note that negative information, such as late payments or defaults, can also remain on your credit report for several years. However, the impact of negative information on your credit score diminishes over time as long as you continue to demonstrate responsible credit management.

Myth 5: Only Income Determines Your Credit Score

Many individuals mistakenly believe that their income is a determining factor in their credit score. They think that having a high income will automatically result in a high credit score, while a low income will lead to a low credit score. However, this is a credit score myth that can lead to false assumptions and financial mistakes.

Your income is not directly included in your credit score calculation. Credit scoring models, such as the FICO score, do not consider your income when determining your creditworthiness. Instead, they focus on factors such as your payment history, credit utilization, length of credit history, types of credit, and new credit applications.

While your income does not directly impact your credit score, it can indirectly affect your creditworthiness. Lenders may consider your income when evaluating your ability to repay a loan or credit card balance. A higher income can make it easier for you to qualify for certain types of credit or secure more favorable terms, such as lower interest rates.

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However, it is important to note that having a high income does not guarantee a high credit score. Responsible credit management, such as making payments on time and keeping your credit utilization low, is more important in building and maintaining a good credit score.

Conclusion

Understanding the truth behind credit score myths is essential for making informed financial decisions. Checking your credit score does not lower it, and closing credit cards or carrying balances on them can actually have a negative impact. Closing old debts does not remove them from your credit report, and your income does not directly determine your credit score.

By debunking these credit score myths, you can avoid regrettable financial decisions and take steps to improve your creditworthiness. Regularly monitoring your credit score, keeping your credit cards open, paying off balances in full, and demonstrating responsible credit management are key strategies for building and maintaining a good credit score.

Remember, your credit score is a reflection of your financial health and can have a significant impact on your ability to secure loans, obtain favorable interest rates, and achieve your financial goals. By understanding the facts and taking proactive steps to improve your credit score, you can set yourself up for a brighter financial future.

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