Introduction
Credit scores play a significant role in our financial lives, influencing our ability to secure loans, obtain favorable interest rates, and even rent an apartment. However, there is a lot of misinformation circulating about credit scores, leading to confusion and uncertainty among consumers. In this comprehensive guide, we’ll debunk the top 5 credit score myths and provide you with the knowledge and tools you need to take control of your credit health.
Understanding Credit Scores
What Are Credit Scores?
Before we debunk common myths about credit scores, let’s first understand what credit scores are and how they’re calculated. A credit score is a three-digit number that reflects your creditworthiness and likelihood of repaying debts. It’s based on information from your credit report, including your payment history, credit utilization, length of credit history, types of credit accounts, and new credit inquiries.
Myth #1: Checking Your Credit Score Lowers It
Debunking the Myth
Contrary to popular belief, checking your own credit score does not lower it. When you check your own credit score, it’s considered a soft inquiry, which has no impact on your credit score. Only hard inquiries, which occur when a lender or creditor checks your credit as part of a loan application, can temporarily lower your credit score. Therefore, you can safely monitor your credit score regularly without worrying about damaging it.
Myth #2: Closing Old Accounts Improves Your Credit Score
Debunking the Myth
Closing old accounts can actually harm your credit score rather than improve it. Your credit score takes into account the length of your credit history, so closing old accounts shortens the average age of your accounts, which can lower your score. Additionally, closing accounts can also increase your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit. To maintain a healthy credit score, consider keeping old accounts open and using them occasionally to keep them active.
Myth #3: Carrying a Balance Boosts Your Credit Score
Debunking the Myth
Contrary to popular belief, carrying a balance on your credit cards does not improve your credit score. In fact, it can actually harm your score by increasing your credit utilization ratio. To maintain a healthy credit score, aim to pay off your credit card balances in full each month and avoid carrying a balance whenever possible. This demonstrates responsible credit management and can positively impact your credit score over time.
Myth #4: Closing Credit Cards with Zero Balances Helps Your Score
Debunking the Myth
Closing credit cards with zero balances can actually lower your credit score by reducing your total available credit and increasing your credit utilization ratio. Instead of closing these accounts, consider keeping them open to maintain a lower credit utilization ratio and improve your credit score. However, if you’re tempted to overspend with additional credit available, you may want to carefully consider whether closing the account is the right decision for you.
Myth #5: Paying Off Collections Will Remove Them from Your Credit Report
Debunking the Myth
Paying off collections does not automatically remove them from your credit report. While paying off collections can stop further negative impact on your credit score, the collection account will remain on your credit report for seven years from the date of the original delinquency. However, paying off collections can demonstrate responsible financial behavior to potential lenders and may have a positive impact on your credit score over time.
Conclusion
By debunking common credit score myths, you can gain a clearer understanding of how credit scores work and how to improve your creditworthiness. Armed with this knowledge, you can take proactive steps to manage your credit responsibly, maintain a healthy credit score, and achieve your financial goals.
FAQs
- What is a credit score?
- A credit score is a three-digit number that reflects your creditworthiness and likelihood of repaying debts.
- Does checking my credit score lower it?
- No, checking your own credit score does not lower it. It’s considered a soft inquiry, which has no impact on your credit score.
- Should I close old accounts to improve my credit score?
- Closing old accounts can actually harm your credit score by shortening your credit history. It’s often best to keep old accounts open and use them occasionally to keep them active.
- Does carrying a balance on my credit cards improve my credit score?
- No, carrying a balance on your credit cards does not improve your credit score. It’s best to pay off your balances in full each month to maintain a healthy credit score.
- Will paying off collections remove them from my credit report?
- Paying off collections does not automatically remove them from your credit report. The collection account will remain on your credit report for seven years from the date of the original delinquency.