There are a lot of credit myths that are out there. Everyone you talk to has a wild idea about what will move your credit score up or down. But, the truth of the matter is that no one really knows for sure.
The three credit bureaus and the Fair Isaac Corporation, who oversee the all entrusted FICO credit score, each have their own proprietary formulas that make up our credit scores. And, they’re not telling! 90% of Top Lenders use FICO® Scores.
But, most of them give us hints of what goes into calculating your credit score and time tested tactics that will help you improve your credit score. But, there still continues to be credit myths out there that are perpetuated through the internet and even at the office water cooler.
Credit Myths that Aren’t True
But, you can take these to the bank. These credit myths have been disproven over the years despite continuing to surface now and again. Here are some of biggest credit myths that you should ignore.
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Myth: Multiple Hard Pulls in a Short Timeframe Don’t Matter
For some reason, there is a myth circulating the internet that you can apply for several lines of credit in the same month without an impact on your credit score. This probably comes from the misunderstanding between hard and soft credit pulls.
The credit bureaus do not count multiple soft credit pulls in a short time period more than once. And, they do not harm your credit any more than the single pull of your credit does move the needle. It’ll move it a few points but not thing big.
A soft credit pull is for a minor credit check. You typically see these types of credit checks when you apply for a new account at your local electric company, city water company, cable television services and the like. The credit bureaus assume that you are probably moving into a new home or apartment with several credit pulls like this.
The credit bureaus allow for multiple soft pulls in a short period of time. The same may be said for when you’re shopping around for rates and getting quotes for one loan, a car loan or mortgage. The credit bureaus know that you are going to shop around for the best interest rate. It’s expected. The credit bureaus do not overly penalize your credit score for these types of credit checks.
It is an altogether different story if you are applying for multiple credit cards in a short amount of times. When a credit card company requests your credit report and credit score from a bureau, the credit bureaus consider that a hard pull. The credit bureaus reduce your credit score for hard credit pulls, even more than soft credit pulls. And, they absolutely penalize you with a lower credit score for multiple hard credit pulls in a short period of time.
Unless you’re applying for a car loan or a mortgage, those multiple credit checks within the same 2-6 week time period probably will not get grouped together. This means that applying for a bunch of credit cards in the same month will leave several hard pulls on your credit history. This information can remain on your credit report for up to two years, dragging down your score in the meantime.
Myth: Closing Credit Cards After Paying Off the Balance Will Improve Your Credit Score
One of the five factors that the Fair Isaac Corporation has said affect your myFICO score is your credit utilization ratio. The credit bureaus will give you a lower credit score if you have a high ratio of your debt to your credit card limits. Paying off a credit card is great for your credit score, but lowering your credit card limits has a negative affect on your credit score.
Closing a credit card is a double whammy for your credit score. Not only might your total credit utilization go up with fewer cards, but you will also have a shorter credit history or longevity.
For example, if you have five credit cards that have $4,000 credit limits each, and you maintain a $2,000 balance on each, your credit utilization ratio is 50%. If you paid off one card balance of $2,000 and then closed that card, you’d still have a credit utilization ratio of 50% ($6,000 / $12,000). You could potentially negate a lot of the benefits of paying off your credit card.
Longevity is another factor of your credit history that plays a major role in the calculation of your credit score too. So, closing a credit card account that has been open for years can reduce that longevity factor and subsequently your credit score.
If you close an old credit line or you have a huge credit line available on that card, then closing it down would probably hurt your credit more than help it. Instead, you may want to keep the credit card open and use it minimally in order to maintain a high credit score. Paying off a credit card every month shows a healthy credit usage habit.
Of course, there will be times when you will simply want to close a credit card account. And, that’s a good thing. You don’t want to needlessly keep a card open just to shoot for a perfect 850 credit score. There is a trade-off and a choice that you have to make, which may make sense for you to close a credit card account.
Myth: It’s Better to Carry a Small Balance Than It is to Pay It All Off Every Month
Why is this still a popular idea? If you have the means to pay off your statement balance every month, your credit score will look a lot better than if you maintain a small balance each month.
The general rule of thumb is that you should never go over 30% of your credit limit each statement period. But, this doesn’t mean you should aim for 30%!
Credit is credit. And, having a credit card balance signals a risk to the credit bureaus even if it is a small balance. Your credit score will not be as good as it possibility can if you carry a balance each month.
The best way to maintain a high credit score is to pay off your credit card balance.
There are a lot of credit myths that are out there. Everyone you talk to has a different idea about what will move your credit score up or down. But, understanding exactly what the credit bureaus and the Fair Isaac Corporation say are attributes that go into their calculations for your credit score is a great starting point for understanding your credit score and what affects it.
Did I miss any credit myths? Which are the most popular credit myths that you constantly hear?