Analysis

4 Lies You’ve Been Told About Your Credit Score

Your credit score is a way of rating how reliable you are as a borrower. If you have a high credit score, it indicates you’re more likely to pay back money you borrow. Based on that, lenders will offer you lower interest rates. You’ll be able to qualify for credit cards with better perks. And you’ll be more likely to get approved when applying to rent an apartment.

Those are just a few examples of how having a high credit score makes life easier. If you’re currently working on your credit score, you may already have an idea of what you need to do.

Unfortunately, some of the credit score wisdom that people share isn’t accurate. If you’ve heard any of the following lies about your credit score, you can and should disregard it.

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1. Carrying a balance is good for your credit score

This is a common misconception, and it’s also one of the most harmful. I often hear about people who keep a $50 to $100 balance on their card every month, even though they could pay it off. And it’s all because of a myth that this is better for your credit than a $0 balance.

It’s good to use your credit card regularly — at least once a month. That may be where this myth comes from. When you use your credit card and pay the bill on time, it builds your payment history, the most important factor in your credit score.

But you don’t need to carry a balance, and there’s no benefit to doing so. There is a drawback — when you carry a balance, your card issuer charges you interest on your purchases. So if you follow this advice, it will cost you money. The best thing to do with your credit card is to always pay the bill in full.

2. It hurts your score when you have too many credit cards

When I tell people how many credit cards I have, they sometimes ask, “Isn’t that bad for your credit score?” Fortunately for me, it’s not. In fact, the number of credit cards you have isn’t a factor in your credit score.

Now, there are ways that opening lots of credit cards can affect your credit. Each time you apply for a credit card or loan, the lender runs a hard credit check on you, which normally takes a few points off your credit score. These hard credit checks can add up if you apply for multiple cards in a short time period.

Also, when you open a new credit card, that lowers the average age of your credit accounts. This is a factor in your credit score, albeit a minor one.

3. You shouldn’t close any credit cards because it will lower your credit score

As mentioned above, the age of your credit accounts impacts your credit score. If you have a longer credit history, then you’re considered a lower risk.

For that reason, a common piece of advice is to avoid closing credit card accounts, especially your oldest credit cards. If you close them, you’ll lose their credit history, the age of your accounts will go down, and your credit score will drop.

Except that’s not how it works. When you close a credit card, it doesn’t just drop off your credit history overnight. If it’s having a positive impact, it stays on your credit file for 10 years (negative accounts stay there for seven years, by the way). During that time, it continues to help your credit score.

4. You have a single credit score

While it’d be a whole lot simpler if this were true, there’s more than just one type of credit score out there. There are three credit bureaus that collect your data and calculate a credit score for you: Equifax, Experian, and TransUnion. There are also two credit scoring systems:

  • FICO® Score is the most widely used by lenders.
  • VantageScore is an alternative created by the credit bureaus, and it’s what many free credit score tools provide.

On top of that, there are many different versions and variations in both of those credit scoring systems. For example, there are FICO® Scores for auto lenders, mortgage lenders, and credit card companies.

The most important takeaway is that you should make sure to use a credit score tool that provides your FICO® Score. Experian CreditWorks℠ Basic is the free tool that I use. This will give you a more accurate idea of the score lenders see when they check your credit.

If you want to learn more about your credit, you can get all the important information in The Ascent’s complete guide to credit scores. Remember that for as complex as credit scores may seem, there are not a lot of steps required to get a high score. Always pay your bills on time, don’t charge too much on your credit cards, and ideally, pay your credit cards in full every month. If you do all that, you’ll be on your way to excellent credit.

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