How to Improve Your Credit Score: Common Credit Score Myths
In the land of credit scores, myths and fallacies abound. Deciphering the truth about how to improve your credit score can be tricky in a sea of misinformation. According to a survey by the Consumer Federation of America, most Americans don't understand how their score is calculated, so we've tackled six common misconceptions about credit scores to help you take control of yours today.
Myth #1: Checking my credit report can lower my score.
When you check your credit report at any of the three major credit reporting agencies, your credit history will reflect a "soft inquiry." Soft inquiries don't hurt your score since a lender isn't reviewing your report to potentially extend new credit. Keeping a close eye on your credit score actually means you're more likely to catch reporting errors and be aware of areas for improvement. Federal regulations allow consumers to check their credit report once a year for free at AnnualCreditReport.com.
Myth #2: Applying for a new credit card will permanently hurt my score.
Opening a credit card is a fantastic way for consumers with little credit history to help build their credit. Applying for a new card results in a hard inquiry on your credit report, and that can negatively affect your credit in the short run. However, repayment history is one of the most important factors that affect your credit score. Demonstrating responsible payment habits is one of the fastest ways to increase your credit score. Just be careful not to open too many cards too quickly; it may signal to creditors you can't manage your financial obligations and could ding your score.
Myth #3: I should keep a balance on my card to improve my credit score.
While using your credit card regularly can boost your credit score, you don't need to max it out to reap the benefits. In fact, you should aim to use no more than 30% of your available credit, since credit agencies look closely at utilization ratios to generate your score. In short, the more credit you have access to and the less of it you use, the higher your credit score will be.
Myth #4: I can boost my score by closing my credit card accounts.
This myth is wrong for two reasons. One, using your credit card and making the payments in full and on time demonstrates you can handle your financial commitments, which is a dependable way to help increase your credit score. Two, canceling a credit card increases your overall utilization ratio, which is the amount of debt you carry compared to the amount of credit you have available. When you close a card, the proportion of credit used to total credit available is higher, which shaves points off your credit score.
Myth #5: Factors like age, race, sex, and national origin have a big impact on my score.
While industries like auto insurance consider characteristics like age and sex to determine rates, this is not the case when it comes to your credit score. The Equal Credit Opportunity Act makes it illegal for credit bureaus to use this type of information when calculating your credit score, which helps prevent discrimination against minorities.
Myth #6: Once I have a poor credit score, it's ruined for good.
There is virtually no financial situation, bankruptcy included, in which your credit will be ruined permanently. Your credit score is a snapshot of how positive your financial history is over a rolling 7-10 years, depending on the scoring model, and it can be rebuilt even if it suffers a serious blow. The older any blips on your credit report are, the less important they become to credit bureaus. This is not to say a damaged score won't take a while to repair, but it is possible with financial discipline and patience. It's a marathon, not a sprint.
These are just a few of the most common myths about credit scores. Knowing fact from fiction will give you the tools to improve your credit score.