Common Credit Myths That Hold You Back

Credit can be a tricky subject, especially with all the misinformation floating around. For young adults, business owners, and those just starting to navigate personal finance, misconceptions about credit can become barriers to achieving financial goals. By understanding these myths, you can approach credit more confidently and make choices that will positively impact your financial future. Let’s address some of the most common credit myths and shed light on the truth behind them.

One of the biggest misconceptions about credit is that having no credit is better than having a poor credit score. While it may seem logical that no credit history could be better than negative credit history, the reality is different. Credit lenders often view a lack of credit history as a risk factor. Without any credit history, lenders can’t determine how responsible a borrower may be with money, which can lead to higher interest rates or declined applications. Building a healthy credit history, even with small, manageable accounts, can provide a foundation for better financial options in the future.

A common belief among those managing their credit is that checking your own credit report will hurt your score. In fact, this is not true. When you check your credit score or report through legitimate means, such as credit monitoring services or the annual free credit report available in most places, it’s recorded as a “soft inquiry.” Soft inquiries don’t impact your credit score. On the other hand, hard inquiries—typically from applying for new credit—can temporarily lower your score. By reviewing your credit regularly, you gain a clear understanding of your financial standing, spot any inaccuracies, and stay on top of possible improvements.

Another prevalent myth is that closing a credit card will always improve your credit score. This might sound logical if you’re trying to limit spending or minimize debt; however, closing a credit card can actually hurt your credit score in several ways. First, it reduces your overall credit limit, which can impact your credit utilization ratio—a major factor in calculating your score. If you’re carrying balances on other cards, this reduction in available credit can increase your utilization ratio, potentially lowering your score. Additionally, closing a credit card can shorten your credit history, especially if it’s one of your older accounts. Maintaining open and paid-off credit cards helps build a positive history and keeps your utilization rate lower.

When discussing credit, the term “bad credit loans” often comes up as a perceived last resort, but it’s essential to note that individuals with low credit scores still have various borrowing options. Rather than focusing solely on loans, consider alternative ways to rebuild credit. Secured credit cards, for example, are accessible to those with lower credit scores and can be an effective tool for rebuilding credit when used responsibly. If you manage your secured card wisely by paying off the balance on time each month, this positive behavior will be reported to the credit bureaus, helping to improve your score over time.

It’s easy to believe that your income directly affects your credit score. However, your credit score is a measure of your borrowing and repayment behaviors, not your income level. While lenders consider income when deciding how much credit to offer, income itself isn’t a factor in calculating your credit score. Instead, factors like payment history, credit utilization, and account age play a more significant role. Maintaining positive credit habits—such as paying bills on time and keeping balances low—will boost your score over time, regardless of income.

There’s also a widespread myth that carrying a small balance on credit cards is beneficial to your credit score. This misconception likely stems from the idea that actively using credit shows responsible management, but it’s unnecessary to carry a balance to demonstrate responsible credit usage. Paying your credit card balance in full each month will keep your credit utilization low and help you avoid unnecessary interest charges. Credit scoring models favor low or zero balances as it indicates you’re not dependent on credit for daily expenses and are capable of paying down debt.

One of the more confusing credit myths is that only large purchases impact your credit score. In reality, how you handle any amount of credit has an impact. Small, routine purchases on your credit card can help build your credit as long as you pay the balance on time. Your credit report reflects the consistency of your payments and overall management, not just the size of transactions. So, whether you use a credit card for small purchases like groceries or large purchases like furniture, timely payments will positively impact your credit over time.

A persistent myth about credit scores is that paying off a debt and closing the associated account will immediately improve your credit. While paying off debt can contribute positively to your financial health, closing accounts can sometimes have unintended effects. For example, paying off a loan can indeed reduce your debt-to-income ratio, but closing revolving credit accounts, like credit cards, may affect your credit utilization ratio. Keeping accounts open after they’re paid off is often a more favorable approach to maintaining a healthy score.

The idea that a single late payment doesn’t significantly impact credit is also a misconception. One late payment can remain on your credit report for up to seven years, potentially lowering your score and affecting your loan eligibility. Credit scores are sensitive to payment history, so even if you miss one payment, it’s worth making immediate arrangements to get back on track. Many lenders offer grace periods or payment arrangements for such instances, and some may not report a late payment immediately if you rectify the situation promptly.

Lastly, some people think that applying for multiple credit cards at once is beneficial for quickly building credit. In truth, applying for several lines of credit within a short period can raise red flags to lenders, who may see it as a sign of financial instability. Each new credit application generally results in a hard inquiry, which can lower your score temporarily. If you’re looking to establish credit, space out your applications over time, focusing on building a solid track record with existing accounts rather than frequently adding new ones.

In a world full of conflicting advice, it’s essential to be informed about how credit works and how various financial behaviors affect your score. Many of these credit myths persist because they seem to make logical sense, but knowing the real impact of actions like closing accounts, making timely payments, and managing credit utilization can be transformative. Whether you’re new to building credit, recovering from past missteps, or simply looking to boost your score, understanding the truths behind these myths can help you make informed financial choices, opening doors to better financial health.