Credit Score Myths Debunked: What Really Matters for Your Rating

Your credit score. That mysterious three-digit number that seems to hold immense power over your financial life. It can be the difference between getting a low mortgage rate and being denied an apartment lease. Because it feels so powerful, it’s surrounded by a cloud of confusion, half-truths, and outright myths.

It’s time to clear the air. Knowing what actually affects your credit score is the first step to building and maintaining a great one. Let’s debunk the most common credit score myths and shed light on the facts.

Myth #1: Checking Your Own Credit Score Will Hurt It

The Myth: You’ve probably heard that every time you check your credit, your score takes a hit.

The Truth: This is the most common credit myth, and it’s dangerously wrong.

• There are two types of credit inquiries:

  1. Soft Inquiry: This occurs when you check your own credit, a lender pre-approves you for an offer, or your credit is checked for background purposes (like by a landlord or employer). Soft inquiries do NOT affect your credit score.

  2. Hard Inquiry: This happens when a lender checks your credit because you’ve applied for new credit (a credit card, auto loan, mortgage, etc.). A single hard inquiry might lower your score by a few points, but the impact is usually small and temporary (lasting less than a year).

The Bottom Line: You should check your own credit report regularly. It’s the best way to spot errors and track your progress. Use annualcreditreport.com to get your free reports from all three bureaus weekly.

Myth #2: You Need to Carry a Credit Card Balance to Build Credit

The Myth: To show you’re a good borrower, you need to have a balance on your card and pay interest on it every month.

The Truth: This is 100% false and a costly misconception. Credit card companies report your balance to the credit bureaus once a month, typically on your statement closing date. They report whether you have a balance and what your utilization is. They do not report whether you paid interest.

• The Smart Strategy: Use your credit card for small, regular purchases you can afford (like gas or groceries). Pay your statement balance in full every month by the due date. This shows you’re using credit responsibly without paying a cent in interest. Carrying a balance only makes banks richer at your expense.

Myth #3: Closing Old Credit Cards Will Always Help Your Score

The Myth: If you have an old credit card you don’t use anymore, you should close the account to simplify your life and help your score.

The Truth: Closing an old account can actually hurt your score in two ways:

1. It Increases Your Credit Utilization: Part of your score is based on how much credit you’re using compared to your total available credit (your utilization ratio). Closing an old card reduces your total available credit. If you have any balances on other cards, your utilization percentage will instantly go up, which can lower your score.

2. It Shortens Your Credit History: Your average age of accounts is a factor in your score. That old card has a long history, which is good. Closing it removes that aged account from the calculation, potentially lowering your average age and your score.

The Bottom Line: If the card has no annual fee, it’s usually best to keep it open. Use it for a small purchase every few months and pay it off immediately to keep it active. If it has a high annual fee, see if you can product change it to a no-fee card before closing it.

Myth #4: Your Income and Savings Affect Your Credit Score

The Myth: Having a high salary or a large amount of money in the bank will give you a good credit score.

The Truth: Your credit reports do not include information about your income, employment history, savings, investments, or rent payments (unless they are reported negatively, like to a collection agency). Your score is calculated solely from the information in your credit report, which is your history of borrowing and repaying debt.

Myth #5: All Debt Is Bad for Your Score

The Myth: Having any kind of debt means you have a bad credit score.

The Truth: It’s not about having debt; it’s about managing it responsibly. A history of on-time payments is the single biggest factor in building a good score. In fact, having a mix of different types of credit (e.g., a credit card and an installment loan like a car payment or student loan) can actually help your score, as it shows you can handle different kinds of debt.

What Actually Matters: The 5 Factors of a FICO® Score

Now that we’ve debunked the myths, here’s what truly makes up your score, according to FICO, the most commonly used scoring model:

1. Payment History (35%): The most important factor. Do you pay your bills on time, every time? Even one late payment can have a significant negative impact.

2. Amounts Owed / Credit Utilization (30%): This is how much you owe compared to your credit limits. Experts recommend keeping your utilization below 30% on each card and across all your cards. Lower is better.

3. Length of Credit History (15%): How long have you had credit? This considers the age of your oldest account, your newest account, and the average age of all accounts.

4. Credit Mix (10%): The types of credit accounts you have (credit cards, retail accounts, installment loans, mortgages).

5. New Credit (10%): How many new accounts you’ve recently opened and recent hard inquiries.

The Real Secret to a Great Credit Score

It’s not a secret at all. It’s simple, disciplined behavior:

• Pay all your bills on time.

• Keep your credit card balances low.

• Only apply for new credit when you need it.

By focusing on these facts and ignoring the myths, you can take control of your credit score and use it to your advantage.

Was there a credit myth you used to believe? Share your “aha!” moment in the comments below!