Do you find your credit score and credit reports to be a little bit mysterious? If so, then you’re not alone. The companies that create credit scores use secret formulas, and everyone else is left to guess what’s in it. Furthermore, there are many aspects of credit scores that are counterintuitive and seem to defy common sense. As a result, there are plenty of myths that have persisted about credit and credit scores.
Here are six credit myths that have been around for some time, and some facts to demystify them:
1. Avoiding credit cards will help your credit score.
There are so many people that have gotten it trouble after misusing credit that this myth can seem to make sense. However, your credit score will be based on your credit history, which you can’t build unless you use credit.
If you avoid applying for credit cards, or other types of loans, you won’t be able to build a credit history and grow your credit score. The best way to grow your credit history and improve your credit score is to use credit responsibly.
2. Closing your credit cards will help your credit score.
Once you understand that you need open accounts in good standing to build your credit history, then it’ll become clear that closing your accounts won’t help your score. Nevertheless, some people still believe this myth. To make it worse, closing your accounts will increase your debt to credit ratio, which is the amount of your outstanding debts divided by total credit extended. When you increase your debt to credit ratio, your credit score can go down. Even if you rarely use your credit cards, it’s better to keep them open and in good standing rather than close them. However, it’s not worth keeping an unused credit card open if you have to pay an annual fee.
3. It will hurt your credit if you don’t carry a balance.
Some credit card users find it difficult to accept that you can avoid interest charges and get a free loan by paying off your credit card statement balance in full each month. It seems like a deal that’s too good to be true. As a result, the myth was created that paying off your statement balance each month will somehow hurt your credit, or at least keep you from building new credit.
Thankfully, this simply isn’t true. If you pay off your statement balance in full each month, you can avoid interest charges while building a positive credit history and a strong credit score. Credit card issuers will still make a profit off of the merchant fees paid by the stores you shop at, and they are happy to keep you as a customer. Furthermore, those who pay their balance in full each month present the least risk of default, which card issuers appreciate. Some card issuers offer charge cards that require that you pay your balance in full each month.
4. Debit and prepaid cards are an alternative way to build credit.
Prepaid debit cards are extremely popular, and can be a good method payment for some people. In addition, a prepaid card can look exactly like a credit card, and can be used in many of the same ways. Unlike a credit card, a prepaid debit card is not a line of credit, and it will not appear on your credit report. This means that a prepaid debit card can’t hurt, or help your credit report or your credit score. Once again, you must use a credit card or some other form of loan in order to show your ability to repay, and build your credit history.
5. There are companies that you can pay to fix your credit report or credit score.
There are many companies that claim to offer some way to fix your credit history, but you should be very skeptical. These companies are either complete scams, or they just perform simple tasks that you can do yourself. For example, you can dispute any actual errors on credit report yourself, but no company will be able to remove factually correct information for you. The best way to improve your credit is to pay your bills on-time, and reduce your outstanding debt.
6. Checking your credit report will hurt your score.
While it’s true that applying for many loans can hurt your credit score, merely checking your own credit report or credit score has no effect. Applying for a credit card or another type of loan is called a “hard pull,” which is an indication that you are looking to borrow money. Merely checking your own credit is called a “soft pull,” and it has no impact on your credit score or credit history.
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