9 credit myths experts wish would die already

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Credit plays a virtually inescapable role in our lives. Yet myths and anecdotal falsehoods about how to build and maintain it persevere.

For instance, Capital One recently published its annual Credit Confidence Study, which surveyed more than 2,300 people who are new to establishing credit, bolstering their score or re-establishing credit. More than half (53 percent) said they are “very confident” that they understand credit.

Yet 52 percent incorrectly believe maintaining a card balance is always good for their credit, 29 percent believe they have only one credit score and 15 percent believe that they can never repair a bad credit score.

“I think myths like these exist because credit can be complicated, combined with the fact that everyone’s situation is unique,” says Nancy Bistritz-Balkan, director of public relations and communications for Equifax. “But the more we talk about the actual facts of credit, the better consumers can understand and manage their unique credit situations.”

Here are 9 common credit myths that experts would like to disappear.

Myth No. 1: Your credit score is the only thing that matters

Yes, your credit scores (whether from FICO or other scoring models) say a lot about your creditworthiness, but Bistritz-Balkan says your credit reports are equally—if not more—important. Lenders may look at your reports in addition to your scores. And delving into your reports can help you better track your credit health.

“Your credit scores certainly are important, but the report gives a bigger picture,” says Bistritz-Balkan. “A full credit report will give the consumer’s entire story on the behaviors they’ve exhibited—the credit lines they’ve had, the accounts they’ve opened and closed, and how they’ve managed their credit over time.”

When looking at your credit reports, Bistritz-Balkan says, verify your personal identifying information, check for inquiries you weren’t aware of and confirm that all past and present accounts are accurate.

Myth No. 2: All credit inquires will negatively impact your score

Bistritz-Balkan hears this myth time and time again. It stems from not knowing the difference between hard and soft inquiries.

Financial institutions make hard inquiries when deciding whether to lend to you (when you apply for a car loan or new credit card, for instance). You must give lenders permission to make a hard inquiry, and it can lower your score by a few points.

Soft inquiries, on the other hand, happen whenever you check your own credit or a prospective employer runs a background check after the interview. These have no impact on your credit score.

“This is important because we want consumers to know their credit scores and not be afraid to check their reports regularly,” says Bistritz-Balkan.

Some experts estimate that 20 to 25 percent of credit reports contain errors.

So get your reports from the Big 3 credit bureaus for free each year at AnnualCreditReport.com. It won’t hurt you.

Myth No. 3: Carrying a small balance is better than paying off your cards each month

This myth persists even though it has no basis in fact, says Randall Yates, a credit repair expert and CEO of The Lenders Network.

“I’ve seen ‘experts’ advise people to carry balances of 15 to 20 percent on their credit cards. This is just not good advice,” says Yates. “Your credit utilization ratio makes up 30 percent of your credit score. The lower your balances are, the higher your score will be. Simple as that. It’s better to have a zero balance than a balance of 10 percent of your credit limit.”

Myth No. 4: Maxing out your credit cards is good for building credit or getting higher credit limits

Maxing out your credit cards can actually drop your credit scores significantly in the short term, says John Ganotis, founder of CreditCardInsider.com.

“Credit scoring models like to see a low utilization ratio, and maxing out credit cards makes you look less responsible to lenders rather than more responsible and deserving of credit limit increases,” says Ganotis.

What’s more, some consumers incorrectly believe they can spend as much as they like on their cards if they pay off the balance on time. In truth, your balance generally gets reported to the credit bureaus before your payment due date. So, to keep your reported utilization low, make multiple payments throughout the month.

“I recommend staying below 30 percent utilization on each of your cards at all times,” says Rosemary Linden, registered investment advisor and founder of Plan to Prosper Financial Strategies.

Myth No. 5: If you don’t use credit, you’ll have good credit

Avoiding credit at all costs is not the smartest way to build a good history and score, says Lee Gimpel, co-creator of The Good Credit Game, a curriculum kit for teaching classes about credit.

“Building a good credit score comes from a responsible pattern of using credit—and a longer history of years is better than a short history of a few weeks or months,” says Gimpel. “Smartly using credit can help you improve your credit score as opposed to not engaging in the credit system at all.”

Myth No. 6: Opening a new card will kill your score

Yes, signing up for a new credit card means your credit score will take a small hit for a hard inquiry, but this doesn’t mean signing up for additional cards is always a bad idea.

“There seems to be a myth that opening a new credit card will have a significantly negative impact on credit, when it’s usually the opposite,” says Ganotis. “You don’t want to overtax your score with hard inquiries, but opening a new line of credit can have long-term benefits, like additional available credit and an additional revolving account, both of which are seen favorably by most credit scoring models.”

Myth No. 7: You should close any credit cards you aren’t using

Closing unused or paid-off cards is not an automatic positive for your credit score.

According to Ian Atkins, financial analyst and staff writer for FitSmallBusiness.com, credit scoring models like to see long-standing accounts. So canceling accounts with history behind them will not only lower your available credit, but could also eventually reduce the average age of your credit lines when those old accounts fall off your credit reports.

“The only reason to consider closing unused credit cards is if they come with expensive annual fees,” says Atkins. “Even then, you may be able to get the fees waived or reduced, or you may find that perks like lounge access or travel insurance make the annual fee something you can live with.”

Myth No. 8: Married couples share credit scores

The truth is that each spouse has individual credit scores based on the accounts in his or her name (even if they share the same last name). That means each person needs to obtain his or her own credit reports, regularly review them and correct errors.

“If one spouse has an account in good standing with a good history, adding a credit score-challenged spouse as a joint account holder will actually help the latter’s score,” says Kevin Gallegos, credit expert and vice president of Phoenix operations with Freedom Financial Network. “The score of the spouse with the better score will not be negatively affected by having the other person on the account.”

Myth No. 9: Co-signing is no big deal

When co-signing a loan for a friend, you are agreeing to repay the debt in full if the primary borrower defaults.

“The lender is requesting a co-signer for a reason, maybe because of bad credit or a poor debt-to-income ratio. In other words, the lender thinks the person you’d be co-signing for is a serious risk for default,” says Atkins. “You need to take the responsibility of co-signing very seriously, because it could negatively impact your credit in the long run.”

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