Considering how ubiquitous credit card usage has become, there's a surprising amount of misinformation out in the world regarding credit scores. A credit score is simply a numerical representation that lenders use to determine the likelihood that a borrower will pay them back. It's derived from a number of specific criteria that assess the general credit risk of a borrower, from the amount of debt they already have to their payment history and other factors.
Read: What Is a Good Credit Score for Your Financial Goal?
Full vs. Partial Payments: Which Is Best for Your Credit Score?
Although credit scoring companies like FICO publicize what information goes into a credit score, there's still plenty of speculation about what exactly moves the needle when it comes to an individual's credit score. Here are some common credit score myths, along with explanations of what can really make your credit score rise or fall.
Last updated: July 26, 2021
Carrying Larger Balances Will Help My Credit Score
Many myths spread widely because they are rooted in the truth. The notion that you have to run up large balances to increase your credit score falls into this camp. The truth behind this myth lies in the fact that yes, you do need to use credit in order to generate a high score. However, the idea that you have to carry large balances every month to boost your score is complete nonsense. In fact, the opposite is true, as large debt balances will actually hurt your score. According to FICO, the amount you owe on your cards comprises a whopping 30% of your credit score. Carrying a high balance on your cards, therefore, has a negative impact on your score, according to Experian. Ideally, according to Experian, you'll want to use less than 30% of both your total available credit and the limit of any individual card; above that level, scores decrease rapidly.
When My Income Increases, So Will My Credit Score
The logic behind this myth actually does make sense, as wealthier individuals do tend to have higher credit scores. Thus, it might be surprising to learn that income plays no role whatsoever in the calculation of a credit score. The five components of a credit score, according to FICO, are payment history, amounts owed, length of credit history, new credit and credit mix. Income is not a part of any of those components. The correlation between income and credit scores most likely comes about because those with higher incomes have more available funds to pay off their debt, thereby boosting their scores.
Getting Married Results in a Joint Credit Score
One of the decisions that couples make when they get married is whether or not they should combine their finances. But if you're worried that you'll have to merge your credit score with your new spouse, fear not. There is no such thing as a joint credit score, only individual ones. Whether you are married or not, your own personal credit history is yours alone. Now, if you open joint accounts with your spouse or sign on as an authorized user, those accounts will typically appear on your credit report as well. But even then, your actual credit score remains your own, and will never be joined with that of your spouse.
Paying Off My Auto Loan Will Help My Credit Score
Now that you've learned that less debt is better when it comes to credit scores, it might seem to make sense that paying off your auto loan would also boost your score. Unfortunately, that's unlikely; in fact, paying off a car loan may actually cause a temporary dip in your score. This is because when you pay off your auto loan, it becomes a closed account on your credit report. As credit mix is a portion of your credit score, you could get dinged if an installment loan drops off your report. However, any drop will likely be short-term in nature and only drop your score by a few points, according to Experian.
Checking My Credit Score Online Will Hurt My Score
Another credit score myth that derives partially from the truth is the notion that checking your score will hurt it. Yes, it's entirely true that if you apply for new credit your potential borrower will run a credit check that may take a few points off your score. However, if you check your score yourself, there will be no effect whatsoever. When you actually apply for credit, it triggers what's known as a "hard inquiry," which can damage your score. However, if you're just checking your own score, or if a lender is performing a routine review of your account, that's known as a "soft inquiry," and it has no effect on your credit score.
Discover: What Is a Good Credit Score?
Using My Debit Card Will Help Me Build My Credit Score
Responsible debit card usage can be a sign of financial maturity, as you'll have to manage your account to ensure you have enough money to pay for all of your monthly expenses. Unfortunately, a sound financial habit like using your debit card won't matter one iota to your credit score. Essentially, using a debit card is the same as using cash. From the perspective of a bank, just because you can successfully manage your cash doesn't mean that you can borrow money from a lender and pay it back. In fact, debit card issuers don't even report to credit agencies. Thus, using a debit card will never have any effect on your credit score.
Taking Out a Mortgage Will Hurt My Credit Score
This "myth" is a bit of a trick question. Yes, it's true that when you first apply for a mortgage loan, your score may dip a few points due to the inquiry. And it's also true that your score may suffer at first when you take out a mortgage, as you'll suddenly have a new account with a large balance and no payment history. However, over time, your mortgage stands to help your credit score quite a bit. As the months go by and you continue to make payments on time, not only will the age of the account increase, so will your successful payment history. Thus, while a new mortgage may ding your score a bit at the outset, over time, it stands to raise it as long as you never miss a payment.
My Credit Score Doesn't Really Matter in the Real World, It's Just for Pride
It's true that some people boast about their 800-plus credit scores as if they are a badge of honor. And yes, earning a top-notch credit score is certainly a sign that you have managed your credit responsibly. However, the real-world implications of a top-tier credit score carry much more importance than simple bragging rights. The higher you can get your credit score, the less interest you'll have to pay on many loans, from mortgages and car loans to personal loans and even credit cards. In some cases, you might not even be able to get a loan unless you have a high credit score. The bottom line is that a high credit score is your key to unlocking low-cost financing and flexibility in your financial life going forward. As a quick example, imagine you can score a 3.25% mortgage rate thanks to your high credit, but your friend with a low credit score can only get financed at 4.5%. On a $300,000, 30-year loan, you'll end up paying $170,023 in interest, but your friend will pay $247,220, or 45% more in interest.
Applying For a Lot of Credit Cards at the Same Time Won't Hurt My Score Much
The concept that multiple card applications in a short time won't hurt your score much is rooted in a related truth, but it's a complete myth. Every single time you apply for a new credit card, that hard inquiry will ding your score by a few points, perhaps even more if you apply for too many at once. This myth is likely perpetuated by the fact that multiple applications for certain types of loans in a short time period -- specifically, home mortgages and auto loans -- are considered by the credit scoring agencies to be a single inquiry. This is because it's natural for a new home or car buyer to shop around to get the best possible interest rate before making such a large purchase. However, as credit card applications are just requests for unsecured loans, there is no such grouping of applications.
Find Out: How To Consolidate Credit Card Debt
I Should Close Unused Credit Cards To Boost My Score
It might seem logical that closing your unused credit cards would boost your credit score. But unfortunately, the exact opposite is actually true. For starters, the closure of a card lowers the amount of your available credit, which can knock your score down by a few points. Things get worse if you have any outstanding debt on other cards, as this reduction in your available credit will increase your credit utilization, another ding against your score. A final concern is the average age of your credit accounts. If you close an account, you no longer benefit from the age of that card in your credit file, nor your successful payment history. Even closed accounts remain on your credit report for 10 years, so this won't have an immediate effect on your score, but eventually, the age and payment history of that account will disappear from your report, and your score will suffer.
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