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Debunking Credit Score Myths for Better Financial Health

Debunking Credit Score Myths for Better Financial Health

Jenius Bank Team12/26/2023 • Updated 12/6/2024
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Understanding how your credit score works may help you improve your financial health. Navigating all the information out there about credit scores may seem daunting, especially if the information you find seems contradictory or misleading. If you believe a credit score myth, it could cause you to make a costly financial mistake or not fully understand how your actions may impact your score.To help clear up any confusion, let’s debunk some of the most common myths about credit scores.

Key Takeaways

  • Your credit score provides lenders with a quick snapshot of your financial wellbeing, with higher scores indicating a history of positive financial habits.
  • Errors may appear on your credit report, but you’re able to dispute and correct them, potentially improving your credit score.
  • Credit scores change over time, and you could improve your score by engaging in positive financial habits like making payments on time, maintaining a low credit utilization ratio, and only borrowing what you need.

What Are Credit Scores?

Before diving into the myths, let’s recap what a credit score is. Your credit score is essentially a snapshot of your financial habits. The score itself depends on whether you’re viewing your FICO score or your VantageScore. These two models weigh your habits differently, but both give you (and potential lenders) an understanding of your creditworthiness. Using your credit responsibly and making on-time payments tends to create higher scores. Missing payments or borrowing too much at once may lower your score.1A strong credit score may help you qualify for a wide variety of borrowing options, from new credit cards to mortgages. A higher score may also lead to more favorable lending terms or faster approval.Landlords may check your credit prior to renting an apartment/home. In addition, many employers check your credit prior to offering you a job. So, having a strong score could benefit more than just your borrowing!If you’re interested in raising your score and improving your financial life even further, we’re here to help.

Top Credit Score Myths

Now that we’ve reviewed credit scores, it’s time to examine some of the more pervasive credit score myths.

Myth: Checking Your Credit Score Lowers It

When you check your own credit score or credit report, you shouldn’t see a change in your score. For example, if you check your score through one of the credit bureaus like Experian, this credit check only triggers a soft inquiry. Soft inquiries are designed to give you (and some lenders) insight into your general financial health and creditworthiness. For example, a lender may perform a soft inquiry to determine if you’re eligible for pre-approval on a personal loan or credit card.Hard inquiries, on the other hand, may impact your score, and too many hard inquiries may cause it to drop. These inquiries occur when you officially apply for a loan or other type of financing so that a creditor can do a full evaluation.So go ahead and check your credit score and read the report to understand how each debt and each action impacts the score calculation. To access your credit report, visit AnnualCreditReport.com to get a free credit report from each credit bureau.

Myth: Closing Credit Cards Improves Your Credit Score

Closing a credit card probably won’t improve your score in the short term. In fact, it may do the opposite and hurt your credit score. Why? Because closing a credit card lowers how much credit you have access to, which in turn impacts your credit utilization ratio. This ratio compares how much credit you’re using (the numerator) against how much you have access to (the denominator). If you lower the amount of credit, you have access to, the ratio increases. If you’re thinking of closing a credit card, consider the following before doing so:
  • Does the card have an annual fee?
  • What is your current rate?
  • What benefits, rewards, or perks does it offer?
  • How long have you had the account open?
  • How would closing the card impact your overall finances?
If the card is fee-free, has a competitive rate, and offers rewards, keeping it may be a good idea. Consider using it for a small recurring charge, like a streaming subscription, to keep the card active. That said, if the card encourages overspending or has an annual fee you don’t want to pay, closing the card may be worth the short-term hit to your score.

Myth: You Can’t Fix an Error on Your Credit Report

Creditors and credit bureaus may make mistakes. Sometimes closed accounts, paid-off loans, or other errors end up on your credit report. Those errors could cause your score to drop if they aren’t fixed. Luckily, credit report errors can be fixed. Contact the credit bureaus and report the error as soon as you catch it. They investigate and correct the issue if they determine that it is a true error. Remember, you can’t remove negative marks, like bankruptcy or late payments, from your credit report, only errors. Additionally, you may find accounts you didn’t open when reviewing your credit report. This may be a sign that your identity was compromised, and someone opened an account in your name. If you don’t report these fraudulent accounts, you’re responsible for any charges associated with them.

Myth: You Can’t Improve a Bad Score

Credit scores change frequently, and just because you have a bad score now doesn’t mean you can’t improve it. Here are a few quick tips for raising your credit score: 2
  • Check your credit report and notify the credit bureaus of any errors you find.
  • Make at least the minimum required payment on all of your debts on time each month and focus on paying off what you owe to lower your credit utilization ratio.
  • Be patient if you have a history of bankruptcy or late payments, as these affect your credit score for seven to ten years.3

Myth: All Debt is the Same

Depending on your experiences, you may have heard a variety of opinions when it comes to debt. Let’s start with the basics – there are two primary types of debt: revolving and installment. Revolving debt refers to debt you’re able to access on a regular basis, repay, and continue accessing over time. An example of revolving debt is a credit card. Installment debt, on the other hand, occurs when you receive a lump sum of proceeds and repay the debt with a fixed payment over a fixed time. An example of an installment debt is a personal loan.Having a mix of revolving and installment debts shows you’re able to handle both and may help your credit score.4

Myth: You Can Have a 900 Credit Score

Though older credit scoring models used to let you work up to a score of 900, newer models don’t. Both FICO® and VantageScore® models cap your score at 850. If you hit that 850 mark, your score is considered perfect. Reaching a score of 850 is tough, but possible. You want to stay on top of your payments, avoid carrying balances on your credit cards, keep old accounts open even if you don’t use them, and monitor your score often.

Myth: Your Credit Score Is High if You Have No Debt

Unfortunately, you typically need to have at least some kind of debt to build a credit history. Without debt, you may be one of the 19% of Americans5 who are considered “credit invisible.” This means you lack a credit history significant enough for the credit bureaus to calculate your credit score.Consider taking out a credit-building loan, personal loan, or other type of debt product like a credit card. As long as you make your payments on time and in full, avoid charging or borrowing more than you can afford to repay, and report fraudulent charges as soon as you notice them, you may see your credit score increase.

Credit Score Truths

Now that we’ve busted some of the most common credit score misconceptions, let’s review some key truths about your credit score.6
  • Your payment history holds the most weight when calculating your credit score. By making consistent, on-time payments, you’re likely to see an increase in your score.
  • Your credit utilization ratio is also a large factor in your score. Opening and closing accounts impacts your ratio (total debt outstanding divided by total available credit), and the lower your utilization ratio is, the more likely you are to have a high score.
  • A diverse credit mix helps your score. Opening a credit card, taking out a mortgage, financing a new or used car, or even paying for college with student loans diversifies your credit mix and may help your score.
  • The older your credit history is, the less impact each individual ding or negative mark may have on your credit score.
  • Different marks stay on your report for different lengths of time.
    • Bankruptcies stay on your report for seven or 10 years, depending on the type of bankruptcy you file.
    • Late payments stay on your report for seven years.
    • Open accounts stay on your report as long as they’re open, and closed accounts in good standing stay on your credit report for 10 years.7

Final Thoughts

Though there are a lot of myths surrounding credit scores, know that engaging in positive financial habits is the first step in helping set yourself up for success. Building (or improving) your credit score takes time, but it is possible. Not sure where to start? Check out our financial wellness guide to get you on the right track.
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