Whenever I go live on Periscope to teach people about how credit works, I’m always left astounded by the questions people ask me. I’ve come to notice that there is a lot of misinformation out there about credit cards, how they work and how they impact your credit score. Let’s face it, you learn about parallelograms in school but no one ever teaches you about credit. That’s one of the reasons people get themselves into so much trouble.
When you do go looking for financial advice online, a lot of it is contradicting. You also have a lot of so-called financial experts perpetuating the same myths that get people into trouble.
Here are some of the most common credit building myths I hear all the time:
You need to carry a balance to show credit utilization.
Oh boy. Where do I start with this one?
First things first, a part of your credit score is contingent upon you actually using credit. That’s why some people say that in order to show credit utilization, it’s best that you carry a balance from month to month.
This is dead wrong.
The key to credit utilization is to use credit responsibly. Using your credit card and paying the bill in full each month already shows responsible credit utilization. Additionally, if you carry a balance you end up losing money in interest payments.
Paying your bill before it’s due increases your credit score.
This credit building myth is based on a truth, but it misses the mark in the end.
Paying your credit card bill before it’s due won’t increase your credit score because the amount you owe was already reported to the credit bureaus.
However, paying your credit card before the closing date for your credit card cycle may help you increase your credit score. Reason being that a $0 will be reported to the credit bureaus, meaning it shows that you owe nothing and therefore aren’t using a huge chunk of your available credit.
You can bump hard inquiries off your report.
Whenever you apply for credit, an inquiry is made on your credit report. You have hard inquiries like loans, mortgages and credit cards you applied for. You also have soft inquiries like the ones triggered by you or your employer.
Your credit score typically falls after a hard inquiry because you are asking for more credit and therefore taking on more risk.
One myth that exists as it pertains to inquiries is that you can load up your report with soft inquiries in order to knock off the hard inquiries.
At this point, this is purely speculative. There is no evidence to suggest this actually works.
Closing old accounts can improve your score.
In fact, closing old accounts can lower your score because a big part of your credit score has to do with how long you’ve had accounts open and what you’ve done with them during that time.
While some people may suggest otherwise, there really is no trick or fast track to building your credit. In actuality, many of the myths that are out there are detrimental to your credit health. Your best bet is to keep it simple by paying off your credit cards in full each month and not spending more money than you can afford.
- myFICO. "What's in My FICO Scores?" Accessed Oct. 4, 2019.
- myFICO. "New Credit," Accessed Oct. 4, 2019.
- Equifax. "Understanding Hard Inquiries on Your Credit Report," Accessed Oct. 4, 2019.
- myFICO. "Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO Score?" Accessed Oct. 4, 2019.
- VantageScore. "Did You Know…The Optimal Credit Card Utilization Percentage Is…" Accessed Oct. 4, 2019.
- Experian. "What Is a Credit Utilization Rate?" Accessed Oct. 4, 2019.