I've noticed credit advice is a lot like weight loss advice—everyone seems to have an opinion, and many times those opinions are wrong.
The problem is, there is a lot at stake.
Your credit score affects things like being approved for an apartment, the cost of borrowing money, and securing small business loans.
Your credit score is a critical part of your overall financial health.
That is why separating the myths from facts is important.
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Myth number 1: Checking your credit score will hurt your credit score
There are two types of credit inquiries: hard and soft.
Hard inquiries usually involve a financial institution or credit card company. These occur when organizations check your score in order to make a lending decision. Hard inquiries lower your score by a few points.
Soft inquiries typically include things like background checks from potential employers or checking your own credit score. A soft inquiry will not impact your credit score.
Where to check your score
The best place to get your credit report is through AnnualCreditReport.com. The government authorizes a free report from all three of the credit reporting agencies—Experian, TransUnion, and Equifax—every twelve months.
However, it's important to keep an eye on your credit in between these annual updates.
I have been monitoring a summary of my credit report through Credit Sesame.
Here is what my dashboard looks like:
Credit Sesame is a free website that offers a score from TransUnion, credit analysis, and monitoring. No credit card is required, so it’s easy to sign up.
You will need to upgrade to a paid plan if you want to receive your complete credit reports and regular monitoring from all three agencies. However, their free plan offers plenty of value if you want to stay updated in between your annual free report from AnnualCreditReport.com.
Myth number 2: Carrying a balance from month to month helps your score
This is arguably one of the most harmful (and expensive!) credit myths.
By carrying a balance from month-to-month, you are stuck paying a premium for your purchases in the form of interest.
Paying your balance in full, on time, every month is one of the best ways to boost your score. 65% of your FICO score is determined by your payment history and amounts owed. This means how often you have paid bills on time and your current amount of debt.
Myth number 3: It’s possible to have a great credit score without a credit card
Many people are afraid to use credit cards because they have seen the crippling effects of consumer debt. However, it's not possible to build credit by only using cash, debit cards, and prepaid cards.
By establishing a variety of credit accounts and paying off these accounts on time every month, you can build a solid credit history.
Myth number 4: Closing old credit cards can help your score
Length of credit history accounts for 15% of your overall credit score.
By closing old credit cards, you may be making two mistakes:
- You are reducing your overall credit history.
- You are increasing the percentage of your overall credit utilization.
Credit utilization is an important factor for your credit scores. The highest scores typically include credit utilization of just 5.6%. You can calculate your credit card utilization rate by dividing your total credit card balances by your total credit card limits.
Tip: Limit yourself to no more than four open credit cards at once. Keep your oldest credit card open, especially if it doesn't incur annual fees.
Myth number 5: Once an unpaid bill is paid off, it will no longer hurt your score
Negative information will be removed from your credit history after seven years. However, the more time that passes, the less it will affect your score. If you continue adding positive information to your report, your score will start to improve.
Knowledge is power: Start improving your score now
Low credit scores make life more expensive and inconvenient.
By monitoring your score regularly with a tool like Credit Sesame, you have the best chance of spotting issues and crafting a plan to improve them.
Readers: What other popular credit myths need to be debunked?