Conventional wisdom surrounding credit scores can contain inaccuracies, half-truths, and outright myths. Credit can be a powerful financial tool and it is important for you to know how to use it to your advantage. Here are some myths that need to be busted when it comes to your credit score.
Myth #1: Checking your score will hurt your credit.
This is a big one. The simple truth is that checking your credit score on any number of free credit score sites online will not affect your score at all. Many banks and credit card companies will include a tool to check your credit score directly on their website or app. It is important to check your score semi-frequently so you know where you stand. When you check your credit score online, you are seeing a consumer credit score, which is different than the score lenders will see when they do a hard inquiry. A hard inquiry will affect your credit score, although not by much as long as you don't have too many in a short period of time.
Myth #2: Paying off debt automatically increases your credit score.
While this can be true, it is not always the case. Paying off different types of debt will affect your credit score differently. Making the last car loan or a personal loan payment, while satisfying, will not impact your score at all. Paying off credit card debt will definitely improve your credit score. The more total debts you eliminate, the lower your debt-to-income (DTI) ratio will become. The lower your DTI, the higher your score will be.
Myth #3: Closing a credit card will boost my score.
Contrary to this popularly held belief, closing a credit card—even one you rarely ever use—will lower your credit score, not increase it. 15% of your credit score is based on the average age of your accounts. Closing a credit card will reduce the average age of your accounts. If you have a credit card you barely use, it's a better idea to make one small purchase a month with that card to keep the account open. Make sure you pay the balance monthly.
Myth #4: Carrying a balance month to month helps my credit score.
In order to avoid losing money on interest, you should aim to pay off the full balance of your cards each month. This will also help keep your credit utilization ratio lower. Your credit utilization ratio is the balance on the card compared to your credit limit. A lower ratio means your score will be higher. Paying off the accounts in full every month, or keeping your credit utilization ratio low, will boost your score.
Myth #5: Paying off a collection account will improve my score.
The only way to get rid of the negative mark left by having a debt sent to collections is to have the entire thing wiped from your credit report. A collection account stays on your report for 7 years. Negotiating a pay-for-delete scenario with the creditor or disputing the mark with the Credit Bureau is the best way to remove this from your report.
Veitengruber Law offers personalized credit repair representation and counsel. We can help you find and challenge errors on your credit report as well as guide you to making the best choices to boost your score quickly and substantially.