The 9 Most Absurd Myths We’ve Ever Heard About Credit Scores
Does Bigfoot exist? Did aliens land at Area 51? Does opening a new credit card ruin your credit score?
You didn’t think there were personal finance urban legends, did you? But they’re all around us.
You may hear them from social media. From your friends. From the woman who scans your groceries every week. And the worst — gasp! — may come from your parents, the very people who raised you to be fiscally responsible.
What Affects Your Credit Score? Don’t Believe These Credit Myths
We’ve unearthed nine common myths about what affects your credit scores, credit cards and credit reports. Have you fallen for any of these tall tales?
1. Checking Your Credit Score Hurts Your Credit.
Nope!
Checking your own credit is considered a “soft pull.” You’ll see it on your credit report (so you can be sure you’re the only one checking your report), but potential creditors will not. It has no impact on your score.
To keep a closer eye on your credit, get your credit score and a “credit report card” from a free credit report app. It breaks down exactly what’s on your credit report in layman’s terms, how it affects your score and how to address it.
2. Signing Up for Another Credit Card Will Hurt Your Credit Score.
This is true, but the effect is brief.
“When you open too many lines of credit in a short amount of time, it gives the impression that you’re desperate for cash and you have money problems, so FICO drops your score accordingly,” Kristin Wong writes in her book, “Get Money.”
But because new credit only accounts for 10% of your FICO credit score calculation, it’s only going to impact your score by a few points.
Once you start making timely payments on that new line of credit, your score will bounce back.
If you’re shopping around for new credit — say, by applying for financing at a car dealership and through your bank to compare interest rates — the credit bureaus will recognize that and bundle your inquiries into a single hard credit pull.
3. Closing Your Oldest Credit Card Will Hurt Your Credit Score.
Closing a credit card will have a negative effect on your credit score because you’ll no longer have that credit available to you. In turn, your credit utilization may increase, making you look like a more risky borrower.
But if closing an account is the only thing that’s changed, your score will balance out in a few months.
“I always thought if you close your account, then one of the negative effects is that you lose your good payment record,” Diane Harris, editor in chief of Considerable said. “That’s not true. That stays on your credit report and contributes to your credit score for years.”
If you have a card you can’t stand — maybe because there’s an annual fee or the temptation to spend is too great — go ahead and close that card. Your credit history will catch up.
4. You Don’t Have a Credit Report Until You Turn 18.
Babies can’t get credit cards, but someone who steals their identity might be able to do so. All identity thieves need is a Social Security number and birthdate to effectively take over someone’s financial life.
Check your child’s credit report periodically to ensure all is well. You can also use the free ChildScan service offered by the Identity Theft Resource Center.
5. The Lowest Credit Score Is Zero.
FICO and VantageScore both score your credit between 300 and 850. Either you have a score above 300 or you don’t have a score.
If your score is below 600 or so, you’re considered a subprime borrower and can expect higher interest rates on new credit cards or loans. If your score is very low, you may not even see it. Instead, you’ll see a “thin file” note when you retrieve your credit score.
“A thin file can be the result of no or minimal credit history,” Erin Lowry explained in her book, “Broke Millennial.” “You may be in the process of building — or rebuilding — your credit and there simply isn’t enough information on your credit report to generate a score.”
In 2015, the Consumer Financial Protection Bureau estimated that 1 in 10 adults in the United States were “credit invisible,” having no scorable credit history.
6. You Should Carry a Balance Sometimes.
Just as it’s not good to use up all your available credit, it’s not good to never use it, either. Keep your card active by using it for small purchases or scheduling a bill to autopay from that card each month.
Your payment history and credit utilization are more important than proving you can be responsible with the occasional revolving balance.
7. If You’re Going Rate Shopping, You Have to Do It Really Fast.
Now you know credit scoring systems bundle similar hard inquiries within a short time period to reduce the impact on your score. But how fast do you have to compare rates for what might be a major purchase?
The rule of thumb is 30 days.
“FICO scores ignore mortgage, auto and student loan inquiries made in the 30 days prior to scoring,” the MyFICO blog explains. “So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping.”
If you want to avoid a hard pull altogether, a good resource is consumer financial technology platform Fiona, which can help match you with the right personal loan to meet your needs.
Fiona searches the top online lenders to match you with a personalized loan offer in less than 60 seconds. Its platform can help you borrow up to $100,000 (no collateral needed) with fixed rates starting at 5.20% and terms from 4 to 144 months.
8. As Soon as You Make a Credit Card Purchase, Interest Starts to Accrue.
It depends on your payment habits after making credit card purchases.
Since 2009, credit card companies have been required to provide at least a 21-day grace period between the date on your billing statement and your due date. If you pay your entire credit card balance, your new purchases made during the grace period won’t accrue interest until after that three-week span. But you have to pay the entire balance — not just the minimum due that month — to get the benefit.
Cash advances and balance transfers don’t get the same grace period.
9. If You Pay Your Credit Card Bill Late One Time, It Won’t Show Up on Your Credit Report.
That depends on how late you were. Any bill you pay more than 30 days late is likely to be reported to a credit bureau, so if you slip up, pay as soon as possible.
More recent late payments have a bigger impact on your credit score, Experian’s blog notes. As you shore up your payment history, the impact of those older late payments will lessen, although they will remain on your credit report for seven years.
Lisa Rowan is a senior writer at The Penny Hoarder.
