Your credit score matters, especially if you plan on buying a home. How credit works, though, is often misunderstood. There are a lot of myths about credit and credit scores swirling around that tend to confuse people. To set the record straight, below we busted 13 credit myths that aren’t true. Keep reading to learn what they are and what is actually true about credit and credit scores.
Myth #1: All debt is bad.
Debt, in general, is not inherently good or bad. It depends on the type of debt. Maxing out your credit cards, for example, is not ideal. Your credit score will go down, you’ll be paying a lot in interest, and the stress of carrying a lot of debt can take a toll on your wellbeing. On the other hand, mortgage debt, even if it is a high amount, is considered good debt because it can potentially increase your net worth.
Myth #2: Your income affects your credit score.
Your income or job title does not directly affect your credit score. Credit scores are based on your credit report’s information, which states how you use and manage debt. Your income isn’t listed on your credit report. However, your income indirectly affects your credit score because it allows you to pay off your debts.
Myth #3: Closing a credit card improves your score.
Closing a credit card may actually lower your score. Credit scores measure risk by the percentage of your available credit that you’re using. If you close an unused account, it reduces the amount of total available credit, thus increasing your percentage of available credit used. That said, if you can’t resist using said credit card, then it is better to close it and avoid getting into more debt.
Myth #4: Checking your credit report lowers your score.
A credit report inquiry only affects your credit score if it’s related to a credit application you’re applying for, such as a loan or a credit card. When you do, you may see your score go down a few points because it’s presumed that you plan to add on debt if you’re applying. Checking your credit report yourself, however, doesn’t affect your score. Checking it yourself regularly is actually a good credit habit to practice.
Myth #5: Credit scores reflect your worth.
Regardless of your credit score, remember that it is not a reflection of who you are as a person and your worth. It is simply a measure of risk and how reliable you are at paying off debts. A low score doesn’t make you a bad person. Focus on practicing good credit habits by paying all your bills on time, lowering your debt, and applying for credit only when it’s absolutely necessary.
Myth #6: Debts are erased once paid off.
Paid off debts stay on your credit report for years. If you practiced good credit habits and paid all your bills on time, it’s a good thing because it’s proof that you’re responsible. But, if, on the other hand, you had late or missed payments on that now paid-off account, that information can stay on your credit report for seven years after it’s paid off.
Myth #7: There is only one credit score.
There are many credit scoring models that are used to calculate a credit score. Each time someone checks your credit, they are doing so for different reasons, so each method looks at your credit history differently, giving some factors more importance than others. So, essentially, you can end up with many possible credit scores. This explains why the credit score you get online when you check yourself is different from the one a lender may pull up.
Myth #8: Credit scores are either good or bad.
There is no such thing as a good or bad credit score. A credit score simply considers your credit history information and uses that to give you a score based on how risky it is to lend you money. At the end of the day, it’s up to the lenders to decide if your score meets their particular criteria, and a score is usually just one of the many factors they take into account when making a decision. So in some scenarios, a “good” score won’t be enough if, let’s say, you don’t have a job. Or, vice versa, a “bad” score may not matter if your income is high.
Myth #9: Debit cards help boost your credit score.
Debit cards are not a form of credit. Debit cards pull money directly from your bank account. Debit information isn’t on your credit reports and therefore doesn’t affect your score.
Myth #10: Married couples have joint credit reports.
While it is possible to get joint credit accounts, your credit report and credit score are yours and yours only. There is no such thing as joint credit reports or scores. They are linked to your social security number. If you do have any joint accounts such as mortgages, car loans, or shared credit cards, those accounts will show up on both of your reports and affect both your scores individually.
Myth #11: You don’t need to worry about credit when you’re young.
Your credit history’s length is an important factor considered when calculating your credit score. So the sooner you can start building your credit, the better. You can apply for credit at 18 years old.
Myth #12: A low credit score lasts forever.
Ruining your credit score can be fast, but raising your credit score can take time, sometimes several months, sometimes several years, depending on the situation. The only way the low credit score will last forever is if you don’t improve your credit management habits.
Myth #13: You have to go into debt to build your credit score.
To build your credit score, you simply need to use your credit and pay on time. That means opening a credit account, using it, and paying it off each month. Carrying a balance isn’t a requirement for building your credit or improving your score. It can only hurt you because you’ll end up paying interest on the balance.