Want a Good Credit Score? Beware These 5 Credit Myths
Don't screw up your credit score when trying to improve it
For some consumers, credit scores are mysterious numbers that dictate their ability to secure credit, get a mortgage or buy a car. If you understand what drives these scores, though, you can improve your access to credit and get better offers on everything from home loans to credit cards.
Your credit score is simply a number that represents the "risk" credit bureaus think lenders will take if they loan you money: The higher your score, the lower your credit risk. It's possible to improve a low score — but if you don’t know how these scores work, you may think you’re improving your score while you’re actually hurting it.
Here are some common myths about credit scores to keep in mind if you are looking to improve your score.
Myth #1: Closing credit cards you're not using will raise your score
Part of your credit score compares your available credit with the amount of credit you’re using. Ideally, the lower the percentage of your available credit you're using, the better (as long as it’s above zero). It should never climb above 35 percent. Closing unused cards will reduce your available credit — and, as a result, your score could plummet.
Myth #2: Paying off a credit card balance each month will hurt your score
In fact, it is good financial behavior and keeps your credit utilization ratio low, which helps you maintain a good credit score. If you have a high balance on a credit card, paying it down or paying it off could bump up your score by as much as 40 points, according to Credit Karma, an online debt management and credit information service. On the other hand, some consumers who hit their credit card limit have seen their scores drop by 40 points overnight, according to the online credit card comparison service Creditcards.com.
Myth #3: If you're trying to establish credit, it’s good to open several accounts quickly
When people are establishing credit, they may think they need to have several accounts to establish a good score, but opening too many accounts at the same time can create a lot of inquiries and ding your credit score. If you’re in the middle of buying a house or refinancing, don’t open any new accounts at all — even a store credit card.
Myth #4: Checking your own credit score will make your score go down
Credit bureaus distinguish between what are called “hard” and “soft” inquiries. Checking your own credit score is considered a soft inquiry and will not affect your score. Someone checking your score because you have applied for credit is a hard inquiry, and that may affect your score.
Myth #5: Canceling a credit card that had a bad payment history will clean up your credit history
Unfortunately, problems on your credit report will stay on your report for seven years, although they will affect your score less as time passes.
Knowing the score
“In terms of trying to get the best credit score possible, the main thing is to make your payments on time, keep your credit balances low and don’t apply for too much credit,” said Bruce McClary, spokesman for National Foundation for Credit Counseling, a nonprofit financial counseling organization. “If you do those things, you are going to be fine.”
For more information about how credit scores work, you can download a free guide to your FICO score, which uses information from the three credit reporting agencies (Equifax, Experian and TransUnion) to predict how likely you are to pay your bills.
At a minimum, credit experts say you should check your credit report at least annually. You can get a free copy of your credit report once a year from the three credit bureaus online. You can also sign up for credit watch programs with a credit bureau to find out what’s affecting your credit score and even follow it daily (for a monthly fee that varies from about $4.99 to $19.99).
“You can’t do anything about the credit report until you know what’s in it,” says Rod Griffin, director of public education for Experian. “Once you know what’s in that credit report, you will be able to take action.”