Introduction
Managing a credit score can be intimidating, and with so much conflicting information out there, it’s easy to fall for misconceptions. These myths not only keep people in the dark but also actively work against building a healthier financial future. Understanding how these myths impact credit scores can empower individuals to make informed decisions, which in turn can improve their financial health.
Checking My Credit Score Will Lower It
Many people avoid checking their credit scores because they fear it will have a negative impact on their credit rating. While it’s true that certain types of credit inquiries can affect your score, checking your own score is not one of them. In fact, regularly monitoring your credit score is essential for identifying potential errors or fraudulent activities that could damage your credit over time.
Types of Credit Inquiries
There are two main types of credit inquiries: hard inquiries and soft inquiries. The distinction between these inquiries is what leads to the misconception that checking your credit will harm your score:
Hard Inquiry: A hard inquiry, also known as a hard pull, occurs when a lender reviews your credit report as part of the decision-making process for a loan, mortgage, or credit card. A hard inquiry typically impacts your credit score by a few points and can remain on your credit report for up to two years. Multiple hard inquiries in a short period, particularly from applications for similar types of credit, can signal to lenders that you may be financially stretched, which could lower your score further.
Soft Inquiry: A soft inquiry, or soft pull, happens when you or another entity reviews your credit report for purposes other than applying for credit. Examples include checking your score to monitor your credit health, pre-approval checks by lenders, or employer background checks. Importantly, soft inquiries have no impact on your credit score whatsoever. Therefore, regularly reviewing your credit score falls under a soft inquiry and won’t harm your score.
Why Monitoring Your Credit Score Is Important
Regularly checking your credit score is actually one of the best practices for maintaining good credit health. By reviewing your credit report periodically, you can quickly spot and address any errors or suspicious activity that might negatively impact your score. In the U.S., each of the three major credit bureaus (Equifax, Experian, and TransUnion) offers one free credit report annually, giving you the opportunity to check your report three times a year without incurring any cost.
Takeaway: Avoiding checking your credit score because you think it will lower your score is a misconception that can ultimately work against you. Regular monitoring is an essential part of effective credit management, and checking your own score has no adverse effect on your rating.
Closing Unused Credit Cards Improves Your Credit Score
It may seem logical that closing old, unused credit accounts would improve your credit score by reducing “excess” available credit or by “tidying up” your credit profile. Unfortunately, this can have the opposite effect, as closing credit card accounts can directly and indirectly lower your credit score.
How Closing Credit Accounts Affects Your Score
Credit scores are calculated based on several factors, two of which are particularly impacted by closing accounts: credit utilization and length of credit history.
Credit Utilization: Credit utilization represents the percentage of available credit that you’re currently using. It’s one of the most influential factors in determining your score, with experts typically recommending that you keep utilization below 30%. When you close a credit card, you reduce your total available credit. If you carry balances on other cards, this increases your overall utilization ratio, which can cause your score to drop.
Length of Credit History: Another component of your credit score is the average age of your accounts. When you close a credit card, especially an older one, you reduce the overall length of your credit history, which can have a negative effect on your score. Closing a longstanding account, even if it’s unused, can shrink the “average age” of your accounts, which is viewed unfavorably by lenders and credit scoring models.
When It’s Okay to Close a Credit Card
In some cases, it may still be advisable to close an account, particularly if it has high fees or isn’t adding value to your credit profile. But before closing an account, it’s important to weigh these potential risks and consider whether a particular card’s impact on your finances justifies the risk to your score.
Takeaway: Closing credit card accounts does not “clean up” your credit history or improve your score. In fact, keeping accounts open (especially older ones) helps to maintain a low credit utilization ratio and a long credit history, both of which positively impact your credit score.
Paying Off Debt Completely Will Instantly Boost Your Credit Score
While paying off debt is undeniably beneficial for your financial health and is often a crucial step toward improving creditworthiness, it doesn’t automatically result in an immediate boost in your credit score. Several factors influence the effect of debt repayment on your credit score, and understanding these can help you set realistic expectations.
The Impact of Debt Repayment on Credit Score Factors
Paying off debt addresses the principal owed but may not fully address the nuances of how debt impacts your credit score. Here’s how debt repayment may or may not affect the main factors of your score:
Credit Utilization: Paying down credit card balances can significantly reduce your credit utilization ratio, particularly if you keep accounts open once the debt is paid off. For many people, lowering credit utilization is one of the fastest ways to see improvements in their score. However, if the debt paid off was a loan (e.g., an installment loan), it may not have the same impact, as credit utilization primarily looks at revolving credit like credit cards.
Length of Credit History: If you completely pay off and close a longstanding account, it can affect the length of your credit history and potentially lower your score. Keeping accounts open (especially revolving credit accounts like credit cards) after paying them off can help maintain the length of your credit history and demonstrate responsible credit usage.
Credit Mix: Credit scoring models reward consumers who demonstrate an ability to manage different types of credit responsibly. If paying off a certain type of debt reduces your overall “credit mix” (for example, by closing your only installment loan), it could have a slight negative impact on your score.
Payment History: While paying off debt eliminates future payments and reduces the risk of missed payments, it doesn’t erase any previous late payments associated with the account. Payment history remains one of the most important aspects of your credit score, and consistent on-time payments have the most lasting impact. Past late payments will still appear on your credit report for up to seven years, even after a debt is repaid in full.
The Long-Term Benefit of Paying Off Debt
Paying off debt provides numerous long-term benefits beyond the initial credit score boost, including better cash flow, reduced financial stress, and increased opportunities for future loans or credit. It demonstrates to future lenders that you can responsibly handle and repay debt, which positively influences your creditworthiness over time. However, the benefits to your credit score may take several months to manifest fully.
Takeaway: Paying off debt is a crucial step toward financial stability, but it doesn’t lead to an instant increase in your credit score. While it may lower your credit utilization and improve your financial profile, the full benefits take time to reflect on your credit report.
Conclusion
Navigating the complexities of credit scores can feel overwhelming, especially when myths cloud the truth. Believing myths like “checking your credit score will lower it,” “closing unused credit cards will improve your score,” and “paying off debt will immediately boost your score” can keep your score lower than it could be. Understanding the actual dynamics of credit score factors—like the impact of credit utilization, length of credit history, and the nature of hard versus soft inquiries—empowers you to make more effective choices for your financial health.
When you know the truth behind these myths, you’re better positioned to create a stronger financial foundation. By consistently monitoring your credit, making thoughtful decisions about account closures, and having realistic expectations regarding debt repayment, you’ll be on the path to improving your credit score over time. In a financial world influenced heavily by credit scores, debunking these myths helps you take control of your financial future, enhancing your credit profile and paving the way for future financial success.
