When it comes to credit, there’s no shortage of myths and misconceptions that can lead to costly mistakes. As women, understanding the truths behind these myths is crucial in taking control of our financial futures. Whether you’re managing your own credit, helping a partner, or teaching your children about financial responsibility, debunking credit myths is a crucial step. Let’s dive into some of the most common credit myths and set the record straight, so you can make informed decisions that benefit your financial well-being..
Myth 1: Checking Your Credit Report Will Hurt Your Credit Score
The Truth: Many people believe that simply checking their own credit report will lower their credit score. However, this is not true. There are two types of credit inquiries: hard and soft. A soft inquiry occurs when you check your own credit or when a lender checks it for pre-approval offers. These soft inquiries do not affect your credit score. On the other hand, hard inquiries, which happen when you apply for credit, can impact your score. Regularly checking your credit report is actually a smart move that helps you stay on top of your financial health and catch any errors early on. Learn more about your credit report.
Myth 2: Closing Old Credit Cards Will Improve Your Credit Score
The Truth: It might seem logical to close old credit cards you’re not using, but doing so can actually hurt your credit score. This is because your credit score is partly based on the length of your credit history and your credit utilization ratio. When you close an old card, you reduce the average age of your accounts and potentially increase your credit utilization, both of which can negatively impact your score. Instead, consider keeping old accounts open, even if you don’t use them regularly.
Myth 3: Carrying a Balance on Your Credit Card Improves Your Credit Score
The Truth: A pervasive myth is that you need to carry a balance on your credit card to build or maintain a good credit score. In reality, carrying a balance is unnecessary and can be costly due to interest charges. The best way to boost your credit score is to pay your bills on time and keep your credit card balances low. Paying off your credit card in full each month demonstrates responsible credit management and avoids unnecessary debt.
Myth 4: All Debt is Bad Debt
The Truth: Not all debt is created equal. While it’s true that some types of debt, like high-interest credit card debt, can be harmful, other types of debt can be beneficial. For example, a mortgage or a student loan can be considered “good debt” because they are investments in your future. Mortgages help build home equity over time, and student loans can lead to higher earning potential. The key is to manage debt wisely and understand the difference between good and bad debt.
Myth 5: A Higher Income Equals a Higher Credit Score
The Truth: Your income has no direct impact on your credit score. Credit scores are determined by your credit behaviour, such as payment history, amounts owed, length of credit history, new credit, and types of credit used. While having a higher income can help you manage debt more effectively, it doesn’t automatically translate to a higher credit score. Your credit score reflects your credit management habits, not how much money you make.
Myth 6: Co-signing a Loan Won’t Affect My Credit
The Truth: Co-signing a loan can have a significant impact on your credit. When you co-sign, you’re essentially agreeing to be responsible for the debt if the primary borrower defaults. This means the loan will appear on your credit report, and any missed or late payments by the primary borrower will negatively affect your credit score. Co-signing should be done with caution, as it can tie your financial future to someone else’s actions.
Myth 7: You Only Have One Credit Score
The Truth: Many people believe that they have only one credit score, but in reality, you have multiple scores. Different credit bureaus (Equifax, Experian, and TransUnion) have different scoring models, and lenders may use different scores depending on the type of credit you’re applying for. This is why you might see slight variations in your credit score depending on where you check it. Understanding that you have multiple credit scores can help you better navigate the credit landscape.
Myth 8: Paying Off a Debt Removes It from Your Credit Report
The Truth: Paying off a debt doesn’t erase it from your credit report. Most negative items, like late payments or collections, can remain on your credit report for up to seven years, even after the debt is paid off. However, paying off a debt is still beneficial because it shows lenders that you’re responsible and committed to managing your obligations. Over time, the impact of negative items will lessen, and your credit score can recover.
Myth 9: You Should Avoid Credit Cards to Maintain a Good Credit Score
The Truth: Some people believe that avoiding credit cards altogether is the best way to maintain a good credit score. While it’s true that you won’t accumulate credit card debt if you don’t have a credit card, this approach can actually harm your credit score in the long run. Using a credit card responsibly—paying your balance in full each month and keeping your utilization low—can help you build a positive credit history and improve your credit score over time.
Myth 10: You Can Pay Someone to Fix Your Credit Score Quickly
The Truth: Be wary of companies that promise to “fix” your credit score quickly for a fee. While it’s possible to improve your credit score over time through responsible financial behaviour, there are no shortcuts. Legitimate credit repair involves disputing errors on your credit report and adopting better credit habits. Paying a company to remove accurate negative information or to boost your score quickly is often a scam. The best way to improve your credit is through consistent, responsible credit management.
Myth 11: Paying only the minimum payment on your credit card each month is enough to maintain a healthy credit score.
Truth: While making the minimum payment on your credit card ensures that you won’t incur late fees and keeps your account in good standing, it’s not the optimal way to manage credit. Minimum payments are often just a small percentage of the total balance, which means it can take years to pay off your debt, and you’ll end up paying significantly more due to accumulating interest. Use a budget to make a plan to pay off your debt
Myth 12: Settling a debt will severely damage your credit score, making it better to avoid settling altogether.
Truth: While settling a debt can temporarily lower your credit score, it’s often a better option than letting the debt go unpaid or heading into bankruptcy. Settling a debt means you’ve negotiated with your creditor to pay less than the full amount owed, which is then reported to the credit bureaus as “settled” or “paid as agreed.”
Conclusion
Credit myths can be misleading and even harmful if taken at face value. Debunking credit myths is essential for anyone looking to take control of their financial future. By understanding the truth behind these common misconceptions, you can make informed decisions that benefit your financial well-being. Whether you’re just starting out or looking to improve your credit, remember that managing your credit responsibly is a lifelong process. Staying informed and debunking credit myths along the way will help you avoid pitfalls and make the most of your financial opportunities. Empower yourself by debunking credit myths and taking the steps necessary to build and maintain a strong credit profile. Knowledge is your most powerful tool, so keep educating yourself, and you’ll be well on your way to financial success.