Forty percent of us think our credit score will climb if we carry a small balance (nope), and 52% donâ€™t realize bad credit can increase the amount needed for deposits on utilities (it does!), according to a NerdWallet survey.
â€œThere are quite a few myths and misinformation about credit scores,â€ says Ryan Greeley, author of the â€œBetter Credit Blog.â€ â€œThis stuff isnâ€™t taught anywhere, so itâ€™s something you have to dig into yourself.â€ The worst time to find out youâ€™ve got a going-nowhere credit score is when youâ€™re trying to buy a home.
Unless you have us to dig for you, that is. Here are seven top credit score myths, and the reality behind them.
Reality: The credit score gods want to know two main things: that you pay your bills on time, and that you donâ€™t constantly max out the credit you have.
And yes, one of the items they like to see you pay is your credit card bill â€” all of it. The only thing a running balance increases is the interest you owe. Thatâ€™s why Erin Lowry, who writes the â€œBroke Millennialâ€ blog, believes banks and credit card companies probably perpetuated this myth to boost their profits.
Reality: â€Missing a payment is the biggest way to hit your credit score,â€ Lowry says. â€œIf you pay a student loan a day late, your score can go down as much as 100 points.â€ So much for that degree making you smarter.
To maximize your score, always pay your installment loans (like car loans and mortgages) on time and in full. You know, like youâ€™re supposed to. But also note that actual humans work for financial companies; if you need to pay late for a legit reason, call your lender â€” before the due date â€” and have a frank conversation. Theyâ€™ll often help out.
Reality: If it was that easy, weâ€™d all be driving Teslas. Credit-reporting companies keep information on your file for seven years, no matter what.
And actually, the longer youâ€™ve responsibly used a particular credit card, the better effect it has on your credit score. Remember, youâ€™re judged by how much of your credit youâ€™re using. Closing a credit card makes that percentage change for the worse.
Reality: Thereâ€™s no reason to save your credit virginity for that special something. If youâ€™ve never used credit, itâ€™s anyoneâ€™s guess how well youâ€™ll handle it once you do. Credit reporting agencies call it a â€œthin file,â€ meaning thereâ€™s not enough information on you to create a credit score. So if youâ€™re a newbie, get an itty-bitty card or loan, and starting fattening up that file.
Reality: How else are you supposed to keep track of the darn thing? Itâ€™s true that several â€œhardâ€ checks by companies can ding your score a few points. Hard checks generally happen when you are actually seeking a loan or line of credit, such as a mortgage or credit card.
If you check your own, itâ€™s called a â€œsoftâ€ check, and it doesnâ€™t hurt your score.
So for Peteâ€™s sake, check your score and credit report at least annually. Itâ€™s super easy these days, especially with websites like creditkarma.com, or use a banking app that lets you easily monitor your score. A sudden, unexplained dip could be a sign that identity theft or mistakes are hurting your credit (and keep hard checks to one or two a year).
Reality: Ah, no. Credit report companies definitely do not punish you for paying off loans early. They might even throw you a parade. (Not really. Put away your princess wave.) While responsibly paying installment loans may be good, paying off those loans is way better.
Reality: What century is it again? Federal law protects you from credit discrimination based on non-credit issues, like race, color, national origin, or sex. Sure, credit card companies or lenders can ask, but they canâ€™t deny you credit based on your answers. Income, expenses, debts, and credit history are what matters.
Reality: Actually, this one is partially true, depending on how fancy your job is. If it requires a security clearance or using a company credit card, an employer will want to know how you use credit, or if youâ€™re in a financial mess that may make you bribe-able, Lowry says. But donâ€™t worry, the employer will ask your permission before pulling your credit report, which is considered a soft pull and wonâ€™t hurt your score.
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