I feel like getting and keeping good credit is something that should be taught in schools. Otherwise you really have to dig to learn the ins and outs of the mysterious FICO score.
Then again, there are many financial topics that should be taught in schools but aren’t.
Just because I’m in my thirties doesn’t mean I was necessarily taught anything about the ins and outs of FICO. Most of my answers have been self taught.
So I’m here with some common credit card myths that I used to believe in the past. The only way to counter the misinformation that abounds about FICO scores is to provide some solid facts. Hope they’re helpful!
1. Applying for Credit Cards majorly damages your credit score
FALSE – Actually, applying for new Credit Cards will likely help your score in the long run because it will lower your debt-to-credit (or credit utilization) ratio and will increase your credit history. Applying for new cards temporarily lowers your credit score- but way less than you may think. The dip will usually be around 5 points. The long term gains you see will likely be much more than that.
2. You must carry a balance on your credit cards to build credit history and increase your score
FALSE- I really used to believe this one and used to wonder what the magic number was- should you carry a 5% balance? 1%? The answer is that you can pay off your cards in full every month and your score will only increase because of your better debt-to credit ratio.
3. Canceling your credit cards is good for your credit score
FALSE – If you’re an out of control spender, financial gurus such as Suze Orman recommend that you cut up your credit cards- but don’t cancel them. Canceling them will lower your all important debt-to-credit ratio, and will likely end up lowering your score. The only time you should cancel a card is when it has an annual fee that you don’t feel is worth paying anymore. It’ll still lower your score a bit, but it may be worth it.
4. Once you have a bad credit score, you can never fix it
FALSE- This is very untrue. Credit scores don’t really reflect how things are today- they’re a collection of happenings over the years. Missed and late payments and other score damagers will actually fall off your report in 7 years! So there’s likely very good FICO news in your future if you got off-track but now are back on.
5. Checking your credit report hurts your score
FALSE- I believed this one forever. But it’s just not true. If you check your own credit, it’s known as a soft inquiry, and doesn’t have ANY effect on your credit score. If someone else (a credit card issuer, lender, etc) checks your credit score, it’s called a hard inquiry, and that affects your credit score. But not by as much as you think (see Myth #1 above).
Hope this was helpful! These are the simplest myths, but I’ll be back with a part 2 very soon 🙂