Credit is a decisive factor in your financial life. The three-digit number influences everything, from whether you are approved for a loan to whether you can rent an apartment or even get hired for some jobs.
With the stakes that high, it’s important to be clear-eyed about what does and does not influence your credit score. The problem: There are a number of credit-related myths floating around that commonly trip people up. Here are some big ones to watch out for.
Myth #1: It boosts your score to carry a balance.
“Nearly 6 in 10 cardholders (59%) say carrying a small balance on their cards will improve their score,” said LendingTree, based on a recent survey it conducted. But this is broadly not true. “In fact, the opposite is more likely to be true.” Carrying a balance from month to month will not only lead you to pay interest on that amount, but it can also drive up your credit utilization rate, which, when high, negatively impacts your credit score.
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Myth #2: Checking your credit score can lower it.
When you check your credit score — a good financial habit to have, actually — it does not affect your score. The misunderstanding here is likely due to a lack of clarity around soft credit pulls and hard credit pulls. “Checking your credit score is considered a ‘soft pull,’ which doesn’t affect your credit score,” said CNBC Select. Instead, it is “actions, such as applying for a credit card,” that involve a hard pull, which is what “temporarily dings your credit score.”
Myth #3: Closing an account will improve your score.
Paying off an account in full and then closing it, or doing the same for an account you no longer use, may seem like good credit hygiene. But in actuality, it can have the opposite effect on your score. That is because when you do so, “your score may take a hit if your credit utilization ratio drops,” said Bankrate. Additionally, the “length of your credit history may change, which could also negatively affect your score,” especially if the account you closed was one of your older ones.
Myth #4: Your income affects your credit score.
When lenders are reviewing your application for a credit card or a loan, they will likely take into consideration your income, as that influences your ability to repay the amount borrowed. Your income does not, however, have a bearing on your credit score. Put simply, “your salary and income are considered measurements of your capacity to pay bills, not your potential credit risk,” said CNBC Select.
Factors that do influence your score include your payment history, credit utilization rate, length of credit history, mix of account types and applications for new credit.
