Debunking four common myths about credit scores that US consumers often believe, providing accurate information.

4 Common Credit Score Myths Debunked for US Consumers

Hey there, US consumers! Let's talk about credit scores. It's one of those things that everyone knows is important, but not everyone fully understands. There's a lot of misinformation floating around, and frankly, some of it can lead you down the wrong financial path. Your credit score is a three-digit number that lenders use to assess your creditworthiness, influencing everything from getting a mortgage to renting an apartment, and even your car insurance rates. So, getting it right is crucial. Today, we're going to bust four of the most common credit score myths that many Americans still believe. We'll dive deep into why these myths are wrong and what the truth really is, giving you the knowledge to manage your credit like a pro.

Myth 1 Closing Old Credit Cards Hurts Your Credit Score

This is a classic, and it's one of the most persistent credit score myths out there. Many people believe that closing an old credit card, especially one you don't use anymore, is a good way to tidy up your finances. The logic seems sound: fewer cards, less temptation, right? However, when it comes to your credit score, this action can actually backfire. Let's break down why.

Understanding Credit Utilization Ratio and Average Age of Accounts

Your credit score is calculated using several factors, and two big ones are your credit utilization ratio and the average age of your credit accounts. When you close an old credit card, you're impacting both of these negatively.

• Credit Utilization Ratio: This is the amount of credit you're using compared to your total available credit. For example, if you have a total credit limit of $10,000 across all your cards and you've used $2,000, your utilization is 20%. Lenders generally like to see this ratio below 30%. When you close a card, you reduce your total available credit. If you close a card with a $5,000 limit and you still have $2,000 in debt on other cards, your total available credit drops to $5,000 (assuming you had another card with a $5,000 limit). Now your utilization jumps to 40% ($2,000 / $5,000), which can significantly ding your score.
• Average Age of Accounts: This factor looks at how long your credit accounts have been open. The longer your credit history, the better it looks to lenders, as it demonstrates a track record of responsible borrowing. Old credit cards contribute positively to this average. Closing an old card shortens your overall credit history, especially if it was one of your oldest accounts, which can lower your average age of accounts and, consequently, your score.

Practical Advice for Managing Unused Credit Cards

So, what should you do with those old credit cards you don't use? Here are some better strategies:

• Keep them open: If they don't have an annual fee, just keep them open. You don't have to use them regularly, but having that available credit helps your utilization ratio.
• Make small, occasional purchases: To keep the account active and prevent the issuer from closing it due to inactivity, make a small purchase once every few months (like a coffee or a streaming service subscription) and pay it off immediately.
• Consider product changes: If a card has an annual fee you no longer want to pay, ask the issuer if you can product change it to a no-annual-fee card. This keeps the account open and preserves your credit history.

Example Scenario: Sarah has three credit cards. Card A has a $10,000 limit, Card B has a $5,000 limit, and Card C (her oldest) has a $3,000 limit. She has a total balance of $2,000 on Card A. Her total available credit is $18,000, and her utilization is about 11%. If she closes Card C, her total available credit drops to $15,000, and her utilization rises to 13.3%. More importantly, if Card C was her oldest account, her average age of accounts will decrease, potentially impacting her score more significantly.

Myth 2 Checking Your Own Credit Score Harms It

This is another widespread myth that often prevents people from monitoring their credit health. The idea is that every time you look at your credit score, it causes a 'hard inquiry' and lowers your score. This is simply not true, and understanding the difference between 'soft' and 'hard' inquiries is key here.

Soft Inquiries vs Hard Inquiries and Their Impact on Your Credit Report

There are two main types of credit inquiries:

• Soft Inquiries: These occur when you check your own credit score or report, or when a lender pre-approves you for an offer (like a credit card or loan) without you formally applying. Soft inquiries do NOT affect your credit score. They are visible only to you and sometimes to the company that made the inquiry. This means you can check your credit score as often as you like without any negative consequences.
• Hard Inquiries: These happen when you apply for new credit, such as a credit card, mortgage, car loan, or personal loan. When you authorize a lender to pull your credit report for an application, it results in a hard inquiry. Hard inquiries can temporarily lower your credit score by a few points (typically 1-5 points) and remain on your credit report for up to two years, though their impact diminishes over time. A few hard inquiries spread out over time are usually fine, but too many in a short period can signal to lenders that you might be a higher risk.

Recommended Tools for Credit Monitoring

Given that checking your own credit score is harmless, it's actually a smart financial habit. Here are some excellent tools and services that US consumers can use to monitor their credit:

• AnnualCreditReport.com: This is the official, government-authorized website where you can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once every 12 months. During the pandemic, this was expanded to weekly free reports, and that's still the case as of late 2023. This is crucial for checking for errors or fraudulent activity.
• Credit Karma: A very popular free service that provides your credit scores from TransUnion and Equifax, along with credit monitoring and personalized recommendations. They use VantageScore 3.0, which is a different scoring model than FICO, but still very useful for tracking trends.
• Credit Sesame: Similar to Credit Karma, Credit Sesame offers free credit scores (Experian VantageScore), credit monitoring, and identity theft protection.
• Experian Boost: This free service from Experian allows you to potentially increase your FICO score by including positive payment history from utility bills, phone bills, and even streaming services that aren't typically included in traditional credit reports.
• MyFICO: While some features are paid, MyFICO offers access to your FICO scores (the most widely used scoring model) from all three bureaus. They also provide educational resources and alerts.
• Bank and Credit Card Apps: Many banks and credit card issuers now offer free access to your FICO score or VantageScore directly through their online portals or mobile apps. Check with your current financial institutions.

Product Comparison:

Usage Scenarios:

• Regular Monitoring: Use Credit Karma or Credit Sesame for weekly or monthly checks to see trends and get alerts.
• Pre-Loan Check: Before applying for a major loan, use MyFICO to get your actual FICO scores from all three bureaus to know where you stand.
• Dispute Errors: If you find an error on Credit Karma, go to AnnualCreditReport.com to pull the official report and initiate a dispute with the relevant bureau.
• Building Credit: If you're new to credit or rebuilding, Experian Boost can be a great way to get a quick bump.

Myth 3 Carrying a Balance Improves Your Credit Score

This is a dangerous myth because it encourages behavior that can lead to debt. The idea is that by carrying a balance on your credit card from month to month, you're showing lenders that you're actively using credit, and this somehow makes you a more responsible borrower. This is absolutely false and can cost you a lot of money in interest.

The Truth About Credit Card Balances and Interest

Your credit score is primarily influenced by whether you make your payments on time and how much of your available credit you're using (your utilization ratio). It does NOT care if you pay interest. In fact, carrying a balance and paying interest is exactly what credit card companies want you to do, but it doesn't benefit your credit score at all. Here's why:

• Payment History: The most important factor in your credit score (around 35%) is your payment history. Making all your payments on time, every time, is paramount. Whether you pay the minimum or the full balance doesn't change the 'on-time' aspect.
• Credit Utilization: As we discussed, keeping your utilization low is key. Carrying a balance, especially a large one, increases your utilization ratio, which can actually hurt your score. The ideal scenario for your credit score is to use a small portion of your credit limit (e.g., 1-10%) and pay it off in full every month.
• Interest Charges: Credit card interest rates can be very high, often 15-25% or more. Carrying a balance means you're paying interest on that balance, which is essentially throwing money away. This money could be used for savings, investments, or paying down other debt.

Best Practices for Credit Card Usage

To maximize your credit score and minimize your financial costs, here's what you should do:

• Pay your statement balance in full every month: This is the golden rule. You avoid interest charges and demonstrate responsible credit usage.
• Keep utilization low: Aim to keep your reported balance below 30% of your credit limit, ideally even lower (under 10%) for the best scores.
• Set up automatic payments: This ensures you never miss a payment, which is the biggest positive impact on your score.

Example: John has a credit card with a $5,000 limit. He spends $1,000 in a month. If he pays the full $1,000 by the due date, his utilization is 20% (when the statement closes) and then 0% after payment, and he pays no interest. His credit score benefits from the on-time payment and low utilization. If he only pays the minimum and carries a $900 balance, his utilization remains high, and he starts accruing interest, which does nothing good for his score and costs him money.

Myth 4 You Only Have One Credit Score

Many people think there's just one magical credit score out there that everyone uses. This is a significant misconception. In reality, you have many different credit scores, and they can vary depending on the scoring model and the credit bureau used.

Understanding FICO Scores vs VantageScores and Multiple Bureaus

Here's the breakdown of why you have multiple scores:

• Three Major Credit Bureaus: In the US, there are three primary credit reporting agencies: Equifax, Experian, and TransUnion. Each bureau collects and maintains its own credit report for you. While they all get information from many of the same lenders, some lenders might only report to one or two bureaus. This means your credit report can vary slightly from one bureau to another.
• Multiple Scoring Models: Even with the same credit report data, different scoring models can produce different scores. The two most common families of credit scores are FICO and VantageScore.
• FICO Scores: Developed by the Fair Isaac Corporation, FICO scores are the most widely used by lenders (estimated to be over 90%). There isn't just one FICO score; there are many versions (e.g., FICO Score 8, FICO Score 9, FICO Auto Score, FICO Bankcard Score). Each version might weigh factors slightly differently, and lenders often use industry-specific FICO scores.
• VantageScores: Developed by the three credit bureaus jointly, VantageScore is another popular scoring model. The most common version is VantageScore 3.0. While similar to FICO, it has some differences, such as being able to generate a score with a shorter credit history.

Why Different Scores Matter for US Consumers

Because lenders use different scoring models and pull reports from different bureaus, the score you see might not be the exact score a lender sees. For example, your bank might show you a VantageScore from TransUnion, but your mortgage lender might pull a FICO Score 2 from Experian. This doesn't mean one score is 'wrong'; it just means they're different calculations based on potentially slightly different data.

How to Navigate Multiple Credit Scores

The best approach is to focus on the underlying health of your credit report rather than obsessing over a single number. If your credit reports are accurate and you're practicing good credit habits, all your scores should generally be in a healthy range. Here's what to do:

• Monitor all three reports: Regularly check your reports from Equifax, Experian, and TransUnion via AnnualCreditReport.com to ensure accuracy across the board.
• Understand the scoring models you're seeing: When you check your score, note which scoring model (FICO or VantageScore) and which bureau it's from.
• Focus on the fundamentals: Pay bills on time, keep utilization low, and maintain a long credit history. These actions will positively impact all your scores, regardless of the specific model.

Example: You check your credit score on Credit Karma and see a VantageScore 3.0 of 720 from TransUnion. You then apply for a car loan, and the dealership pulls your FICO Auto Score 8 from Experian, which comes back as 705. Both scores are good, but they're different because of the scoring model and the bureau used. The underlying credit behavior (on-time payments, low utilization) is what truly matters.

Understanding these common credit score myths is a huge step toward taking control of your financial health. By knowing the truth about closing old cards, checking your own score, carrying a balance, and the existence of multiple scores, you can make smarter decisions that will positively impact your creditworthiness for years to come. Keep learning, keep monitoring, and keep building that excellent credit!