5 Common Credit Myths Debunked
Your credit score plays a crucial role in your financial life, influencing everything from loan approvals to interest rates. However, there’s a lot of misinformation out there when it comes to credit, which can lead to confusion and poor financial decisions. In this post, we’ll debunk five common credit myths to help you better understand how credit works and how you can use it to your advantage.
Myth #1: Checking Your Own Credit Report Will Hurt Your Score
Many people believe that checking their own credit report will negatively affect their score. This is not true.
Reality: When you check your own credit report, it’s considered a soft inquiry, which does not impact your credit score. Soft inquiries occur when you request your credit report, or when a company checks your credit for promotional or pre-approval purposes. The only time your credit score is affected is by a hard inquiry, which typically happens when you apply for a new credit card, a loan, or a mortgage.
So, don’t be afraid to regularly check your credit report. In fact, it’s a good idea to do so annually through the AnnualCreditReport.com website, or more frequently through your Transcend Digital Banking.
Myth #2: Closing Old Credit Accounts Will Boost Your Credit Score
Many people think that closing old, unused credit accounts will improve their credit score, especially if they have high credit limits. But, in fact, this can hurt your credit score.
Reality: Closing old accounts can negatively impact two factors of your credit score: your credit utilization ratio and the length of your credit history.
Credit Utilization: When you close a credit account, you decrease the amount of total available credit you have. If you have an existing balance on your other accounts, this could increase your credit utilization rate (the ratio of how much credit you're using compared to your total available credit). A higher credit utilization ratio can lower your score.
Length of Credit History: The longer your credit history, the better it is for your score. Closing old accounts shortens your credit history, which could hurt your score as well.
It’s typically better to keep old accounts open, even if you don’t use them regularly. However, if they have high fees or if you’re tempted to overspend, it might make sense to close them after considering the impact on your credit.
Myth #3: Carrying a Small Balance on Your Credit Card Helps Your Credit Score
Many people think that carrying a small balance on their credit cards is good for their credit score because it shows they’re using credit responsibly. But this myth can actually lead to unnecessary interest charges.
Reality: What really matters for your credit score is your credit utilization, which should ideally be below 30%. If you carry a balance, even a small one, you’re still incurring interest charges, and it could potentially hurt your score if your utilization is too high.
The best strategy for maintaining a good credit score is to pay off your balance in full each month. If you’re not able to pay it off completely, try to at least pay more than the minimum payment and keep your balance as low as possible. This way, you avoid interest charges and maintain a healthy credit utilization ratio.
Myth #4: A Credit Score of 700+ Guarantees Approval for Loans
Having a credit score of 700 or higher is definitely an excellent sign, but it does not guarantee that you will be approved for every loan or credit product.
Reality: While a score of 700 or above is considered good, lenders take more into account than just your credit score when evaluating a loan application. They also consider:
Debt-to-Income Ratio: How much debt you have compared to your income.
Income Stability: Lenders will want to ensure you have a steady income that can cover the loan payments.
Employment History: Having a stable job history can be an important factor.
Credit History: A long, positive credit history shows that you manage debt well.
So, while a 700+ credit score gives you an advantage, other factors like income, employment history, and overall debt load also play a significant role in loan approval.
Myth #5: Paying Off Collections Will Immediately Remove Them from Your Credit Report
A common misconception is that once you pay off a collection account, it will automatically be removed from your credit report. Unfortunately, this isn’t the case.
Reality: Even after you pay off a collection account, it can remain on your credit report for up to seven years from the original delinquency date. Paying it off may improve your credit score over time, but it won’t erase the negative mark right away. The best thing you can do is work with the collection agency to settle the debt and then focus on improving your overall credit habits to offset the negative mark.
Credit scores can be confusing, and it’s easy to fall for common myths that may hurt your financial health in the long run. By debunking these myths, you can make smarter decisions when it comes to managing your credit. Whether you’re building credit from scratch or looking to improve an existing score, remember that responsible credit use—such as paying on time, keeping balances low, and avoiding unnecessary debt—is the key to long-term success.
If you’re ever in doubt, don’t hesitate to reach out to us for personalized advice on improving your credit. Your credit score isn’t just a number—it’s an important tool that can help you achieve your financial goals.
Need an extra hand to take charge of your credit? Contact us today!