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Don’t Fall For These Credit Score Myths
Americans don’t have a good handle on credit scores – and it’s a problem that isn’t going away, considering how many financial consumers swing and miss on credit questions.
According to a new study by Zillow Population Science, the average American can only correctly answer two of five credit score questions, with younger and older U.S. adults all struggling to get a grip on credit scores and how they work.
Part of the problem is the social media-weighted financial culture in the U.S. and abroad. While technology teams at Twitter, Facebook and Reddit, among other social media giants, flail at digitally-based misinformation campaigns, too much disinformation flows through social media. That leads to credit scoring myths gaining credence and seeping into the public consciousness.
That’s a mistake, as a better understanding of credit scoring realities would likely have a big impact on credit score growth across the U.S.
The Credit Myths That Cause the Most Damage
What are the largest and most onerous credit score myths? Here are six top candidates from personal finance experts.
The credit card balance myth. One of the biggest and most damaging credit score myths is that you have to carry a balance on your credit card from month to month to improve your score.
“This myth is a misunderstanding of the credit utilization ratio portion of the credit score, which accounts for 30% of the FICO credit score,” said Kimbree Redburn, a financial coach and owner at Illuminate Financial LLC, in Bozeman, Mon.
According to Redburn, the credit utilization ratio looks at how much of your available credit you actually use (i.e. for example, you may use 50% of your credit card limit.) “You want to keep your usage below 30% of your available credit to improve your score,” Redburn said. “But consumers mistakenly believe that to have credit utilization improve your score must carry a balance. This hurts consumers because maintaining a balance from month-to-month costs them interest, sometimes at very steep rates.”
“As long as credit utilization is kept below 30% of available credit, even if it is at zero, it’s still helping your score,” Redburn said.
- What is a Credit Utilization Ratio?
- How Do Credit Utilization Ratio and Debt-to-Income Ratio Affect My Credit Score?
Checking your credit score will hurt your credit score. Another score-damaging myth is that checking your credit score will lower it.
“When a consumer checks their own credit, it is what is known as a soft pull,” Redburn said. “This means that it doesn’t show up on their credit report. Yet, believing that checking their own credit lowers their scores causes consumers to be in the dark about their credit – and not catch errors in their credit reports that can lead to problems in the future.”
RELATED: Hard vs Soft Inquiries on Your Credit Report
Installment debt isn’t a big deal with credit scores. Conventional wisdom can lead to a serious credit scoring problem on installment loans. These loans, paid off on a month to month basis, usually occur with home mortgages, auto loans, personal loans, and student loans.
Having some experience with installment loans can help build your credit score, but too many people are being told that installment loans don’t have a big impact on credit scores. That’s a myth.
RELATED: Debunking the Biggest – and Most Damaging – Credit Score Myths
“In reality, a person really does need some type of installment loan in their financial history,” said Matt Schmidt, chief executive officer at Diabetes Life Solutions, a life insurance company in Pittsburgh, Pa. “About 10 years ago, I decided to pay off the remainder of my student loans. I thought this would be responsible, as I was always taught that there’s no good debt.”
By being a prudent borrower, however, and paying off the student loan, Schmidt would actually be penalized with a lower credit score.
“Since my student loans were my only form of installment debt, my credit score dropped about 30 points,” he said. “Unfortunately, I was in the process of buying a home, and this impacted the interest rate on my mortgage. Long story short, I had to wait a few months to continue the purchase of my house, until the credit score slowly went back up.”
RELATED: Figuring Out Why Your Credit Score Fell
Your income determines your credit score. This is a common misconception among financial consumers, but it’s just not so. “The truth is, your salary and income are just used to measure your capacity to pay your dues but not your potential credit risk,” said Michael Hammelburger, CEO at The Bottom Line Group, in Baltimore, Md.
Your credit score is merged with your spouse’s credit. Many people erroneously think that by getting married, their credit score will be merged with their spouse’s credit. “It’s somehow a common misconception among people, especially during the pandemic,” Hammelburger said. “But that’s not the case, as I’ve never seen a credit report that’s based on a married couple.”
RELATED: Does Your Spouse’s Credit Affect Your Credit Score?
Debt consolidation can hurt your credit score. Another credit score myth – debt consolidation can negatively impact credit.
While taking out any loan can lower your, the impact may not be as drastic you may think, especially if you use a personal loan with a moderate interest rate attached.
“As soon as you pay your loans on time, you’ll be able to reduce your credit utilization ratio and eventually close down your debt accounts,” Hammelburger said. “Therefore, the impact to your credit score is only temporary as long as you start rebuilding your credit history through on time payments.”
Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.