If you know what to look for, your credit report can be a powerful tool in boosting your credit score and reaching your financial goals.
There’s a lot of “credit score advice” floating around that isn’t accurate and ends up doing more harm than good. Credit scores don’t have to be a mysterious area of your personal finances and improving them doesn’t have to be done through trial and error.
Four Common Credit Score Myths
Myth #1: You Have No Control Over Your Credit Score
This may seem true considering the credit bureaus keep how they calculate your score a secret and you can’t access your credit report whenever you want (not for free, anyway). Due to these unknowns it can be confusing, especially since it’s possible to be financially stable and still have a not so good score.
It’s OK to find credit scores perplexing, but if you have an accompanying “there’s nothing I can do about it” attitude, ditch it. Your credit score is a reflection of your borrowing and repayment behaviors, and that means you’ve got a lot more control over it than you think.
Myth #2: There’s A “Quick Fix” For Your Credit Score
Boosting your credit score doesn’t happen overnight regardless of what you might hear on a late night ad or read in any junk mail. The good news is that the things you can do to positively influence your score are simple and don’t require a lot of time – or even much effort.
The trade-off is that you’ll have to be patient while waiting for your new good credit habits to take effect. Your credit score is more of a track record than a snapshot, so consistency is key.
Myth #3: Checking My Credit Report Will Negatively Affect My Score
This myth comes from not knowing there are two types of credit score inquires and how they’re different:
- Hard inquiries are made by lenders or credit card companies when you apply for a new line of credit – a loan, a credit card, or a mortgage for example.
- Soft inquiries are made by you or by others for background check purposes – such as a potential employer or landlord.
Hard inquiries usually lower your credit score because they suggest you might be taking on more credit soon. Soft inquiries, on the other hand, do not affect your score in any way. This means there is nothing to lose by checking your own score – in fact, doing so will help you understand what your current credit activity looks like and how you can improve it.
There are some situations (like renting a car or a landlord running a credit check) where either a hard inquiry or a soft inquiry can be made. In these cases, it’s a good idea to find out beforehand what kind of inquiry will be made so you know what to expect.
Myth #4: Opening Or Closing A Bunch Of Credit Cards Will Improve My Score
Even though these actions are complete opposites of each other, this myth is still widespread – and very misleading. This is because opening and closing credit cards affect several different aspects of your credit score.
Opening new credit cards gives you more available credit to use each month, which – if used responsibly – can lower your credit utilization ratio. For example, if you have one credit card with a $1,000 limit and charge $200, your credit utilization ratio will be 20%.
Lowering your credit utilization ratio is a good thing, so opening new credit cards to boost your score might seem like a solid strategy. However, remember those pesky hard inquiries? With each new credit card opened comes a hard inquiry and each will dock a few points from your score. If several are made within a short time period, it also makes you look risky, which can have a negative impact on your credit score.
So then closing a bunch of accounts must be the way to go, right? Not quite. Depending on the accounts you close, you could unintentionally raise your credit utilization ratio and shorten the overall length of your credit history. Both of these consequences lower your credit score.
The best approach is to space out any credit account openings or closings. Try to time them in a way that any short-term negative impact on your credit score won’t interfere with an important upcoming car loan or mortgage.
Keep In Mind
- Do your research.
- Only apply for credit products you need.
- Understand what a specific credit card is contributing to your score before making the decision to close it. That first college credit card may have a low limit and no rewards, but if it’s adding a few years on to your credit history, it’s best to keep it in rotation.