You Need to Carry a Balance to Build Credit
This is perhaps the most expensive myth floating around social media. Paying off your credit cards in full every month is the best way to improve a credit score or maintain a good one. Yet somehow, countless Americans are convinced they need to carry debt to impress credit scoring algorithms. The myth that “paying less than the full amount and revolving a balance helps you build your score drives me crazy,” said FICO executive Ethan Dornhelm. Think about it like this – if your friend always paid you back completely and on time, wouldn’t you trust them more than someone who only made partial payments? Part of your credit score depends on the amount of credit you have versus the amount you’ve used, and paying off your entire balance is best and keeps the ratio low, strengthening your credit scores. That interest you’re paying? It’s just money down the drain.
Checking Your Credit Score Hurts It
One of the most pervasive myths is that checking your own credit score will harm it. Though 93% of millennials are aware of their credit score, this is probably the most common myth. Here’s the reality: When you check your credit score, it’s considered a soft inquiry and does not affect your credit score. Soft inquiries, like those you make on your own or those done for pre-approval offers, do not impact your score at all. Hard inquiries happen when you actually apply for credit. Federal law lets you get a free credit report from each bureau annually (right now, through 2025, you can even get them weekly for free due to special arrangements). It’s like thinking that looking at your bank balance would somehow make money disappear from your account.
Higher Income Automatically Means Better Credit
Your salary and income are considered measurements of your capacity to pay bills, not your potential credit risk. “Income isn’t even on your credit reports so it can’t impact your score,” says expert John Ulzheimer. Although credit bureaus don’t take race or ethnicity or income into account when generating credit scores, people in low-income communities are more likely to have low or no credit scores. Using a unique proprietary data set that includes consumers’ credit scores and self-reported household income, researchers found that household income is moderately correlated with consumers’ credit scores, and cross-sectional variations in household income account for a modest fraction of variations of credit scores. You could be a millionaire with terrible credit, or earn minimum wage with an excellent score. Variables include your payment history, amounts owed (utilization rate), length of credit history, new credit (how often you apply for and open new accounts) and credit mix (the variety of credit products you have).
You Only Have One Credit Score
You have multiple credit scores. Many credit scores are available to you and lenders. Often, the score you see isn’t the exact same as the one the lender sees. You have multiple credit scores. In fact, you have dozens of scores. Your score depends on which credit reporting company provided the information used to calculate the score, the scoring model, the type of loan you’re seeking, and even the day when it’s calculated. There are three major credit bureaus (Experian, Equifax, TransUnion), each with its own data on you. It’s like asking someone their height and getting different answers depending on whether they’re wearing shoes, standing on carpet, or being measured by different people with different rulers. Because of this, it’s also normal to see slightly different numbers throughout the year and from different sources.
Shopping for Loans Will Destroy Your Score
Shopping around for credit and comparing loan offers can help you find the best terms and for some kinds of credit, won’t impact your score much if done in a short period of time. The key phrase here is “short period of time.” Credit scoring models understand that smart consumers shop around. Hard inquiries stay on your credit report for two years (but typically affect your credit for just the first year). Space out credit applications and only open new accounts when necessary. Think of it like browsing multiple car dealerships in one weekend versus visiting one every month for a year. Hard inquiries occur when you apply for new credit, such as a mortgage, auto loan, or credit card, and can temporarily lower your score by a few points because they signal that you’re seeking new credit. Multiple hard inquiries in a short time can have a cumulative impact, so it’s best to space out applications. Rate shopping for mortgages or auto loans within a 14-45 day window typically counts as one inquiry.
Your Credit Utilization Should Be Zero Percent
Counterintuitively, however, a utilization rate of 0% is actually worse than 1%. That’s because credit scoring models need some usage to go off of when calculating your score, and 0% utilization doesn’t tell them much about your credit habits. As a result, the best revolving credit utilization ratio may be 1%. While there’s no specific point when your utilization rate goes from good to bad, 30% is the point at which it starts to have a more pronounced negative effect on your credit score. As the data above illustrates, those with the highest scores tend to have credit utilization in the low single digits. “Amounts owed” make up 30% of your FICO® score. “Percentage of credit used” makes up 20% of your VantageScore®. It’s like a gym membership – you need to actually use it occasionally to show you know how. In 2023, the average credit utilization ratio among consumers was 29%, according to a 2024 report from Experian.
Closing Old Credit Cards Will Improve Your Score
This is one of the most misunderstood myths about credit scoring. Closing a credit card account that you no longer use can hurt your credit score by reducing your total available credit. Thus, if you continue to charge the same amount or carry the same balance on your remaining accounts, your credit utilization ratio will increase, and your score may decrease. Closing old credit card accounts can actually be bad for your credit score in a few different ways. But you don’t have to hold on to credit cards or drag out paying off a loan because you’re concerned that your good management of the account will be forgotten. Closing a credit card can affect your credit utilization ratio, as it lowers your overall credit limit and average length of credit. Even if you have the same balance across all your cards, the lower credit limit can increase your credit utilization. Think of it like throwing away your longest-running reference letter when applying for a job.
Credit Counseling Will Ruin Your Credit
Credit counseling itself will not negatively impact your credit score. So, if you’re seeking help, don’t be deterred. Credit counseling can be a valuable tool for improving your financial health. On average, DMP clients have seen their credit score improve by 62 points after two years. After successfully completing a DMP and rebuilding their credit, MMI clients saw their credit scores go up 82 points. MMI conducted a four-year analysis of credit score data and found that clients who started and maintained a DMP with MMI improved their credit scores by 82 points from start to finish on the program. While a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score. Credit counseling is like getting a financial trainer – the process itself isn’t punishment, it’s preparation for better performance. Working with a credit counselor or starting a DMP won’t have a direct impact on your credit scores, though creditors may add a note to your credit report that you’re using a DMP to pay the account.
Perfect Credit Scores Give You Special Benefits
While you’d certainly be entitled to bragging rights for having a perfect 850 credit score, there are no exclusive benefits reserved for those in this elite range. You get most of the significant credit score benefits when entering the “excellent” credit range (typically 740 and above). This includes access to the lowest interest rates on mortgages, auto loans
