There are lots of myths about credit that might not be true. These stories, or myths, can trick people into making money choices that are not so wise.
In this blog post, we’re going to uncover and explain some of these myths about credit.
Our goal is to help you understand what’s real and what’s not, so you can make smarter choices with your money.
Here are the 5 most common myths about credit:
- Checking Your Credit Score Lowers It
- Debit Cards Build Credit
- High-Income Guarantees Approval
- Bankruptcy Ruins Your Credit Forever
- Paying Cash Builds Credit
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Myth 1: Closing a Credit Card Improves Your Credit Score
Why the Myth Exists:
Some individuals believe that by reducing the number of open credit lines, they are perceived as less of a risk to lenders, thereby improving their creditworthiness.
Debunking the Myth:
Closing a credit card account can actually have a negative impact on your credit score. The credit utilization ratio, which is the amount of credit you’re currently using compared to your total available credit, plays a significant role in your score.
Closing a credit card reduces your available credit, potentially increasing your utilization ratio. This can signal to creditors that you are utilizing a higher percentage of your available credit, which may be viewed as a financial risk.
It’s essential to maintain a healthy mix of open credit accounts and manage credit responsibly to positively impact your credit score.
Myth 2: Checking Your Credit Score Lowers It
Why the Myth Exists:
This misconception might arise from the association between credit inquiries, especially “hard inquiries” from lenders during loan applications, and potential negative impacts on the credit score.
Debunking the Myth:
Checking your own credit score is considered a “soft inquiry” or “soft pull,” and it has no impact on your credit score.
Soft inquiries are initiated by the individual for personal reasons, such as monitoring their financial health. On the other hand, “hard inquiries” made by lenders during credit applications can have a minor and temporary impact on your score.
Regularly monitoring your credit score is a responsible financial habit and does not harm your creditworthiness.
It enables you to stay informed about your financial standing and address any potential issues promptly.
Myth 3: Income Affects Your Credit Score
Why the Myth Exists:
People might confuse credit scores with the debt-to-income ratio, which is a measure of how much of your income goes toward paying off debts.
While this ratio is important for loan approval, it is not a component of credit scores.
Debunking the Myth:
Credit scores are calculated based on your credit history, payment behavior, credit utilization, length of credit history, and other financial factors.
While a stable income is crucial for managing debt and maintaining good financial health, it is not a direct factor in determining your credit score. Lenders are more interested in your ability to manage credit responsibly and make timely payments.
Understanding the components that contribute to your credit score can help you focus on building a positive credit history without relying on income as a determining factor.
Myth 4: Debit Cards Build Credit
Why the Myth Exists:
There might be gaps in financial education, and some individuals may not fully understand the distinctions between credit and debit cards.
Debit cards and credit cards can be used in similar ways for everyday transactions. People may assume that if they are responsible for their debit card spending, it reflects positively on their credit.
Debunking the Myth:
Debit card usage does not contribute to your credit score. Unlike credit cards, which involve borrowing money that needs to be repaid, debit cards are tied directly to your bank account, and transactions with them do not influence your credit history.
To build or improve your credit score, it’s essential to use credit responsibly, such as making timely payments on credit cards or loans.
Understanding the distinction between debit and credit transactions is crucial for making informed financial decisions and managing credit effectively.
Myth 5: Having No Debt Means a Perfect Credit Score
Why the Myth Exists:
Some individuals believe that maintaining a debt-free lifestyle automatically results in a perfect credit score.
This false belief may arise from the assumption that debt is inherently negative and that eliminating it guarantees a flawless credit history.
Debunking the Myth:
While being debt-free is undoubtedly a positive financial situation, having no debt does not necessarily translate to a perfect credit score.
Credit scores consider various factors, including the types of credit accounts you have, the length of your credit history, and your payment behavior.
A diverse credit mix and a history of responsible credit use contribute to a higher credit score.
Striving for a balance between responsible credit management and financial stability is key to achieving and maintaining a positive credit score.
Myth 6: Paying Off a Negative Record Removes It Immediately
Why the Myth Exists:
The myth that paying off a negative record removes it immediately likely exists due to a misunderstanding of how credit reporting and the removal of negative information work.
Likewise, individuals facing negative records on their credit reports may be eager to improve their credit standing quickly.
The idea of immediate removal upon payment is appealing, even though it doesn’t align with how credit reporting typically functions.
Debunking the Myth:
Negative information, such as late payments or defaults, can stay on your credit report for several years, even after you’ve paid off the debt.
The impact of these negative records on your credit score may lessen over time, but the information remains on your report as part of your credit history.
It’s crucial to address and resolve negative records, but the timeline for their removal is determined by credit reporting regulations.
Myth 7: Credit Repair Companies Can Remove Accurate Information
Why the Myth Exists:
Some credit repair companies may engage in misleading marketing practices, promising to “erase” or “clean” credit reports, creating the false impression that they can remove accurate negative information.
Debunking the Myth:
Legitimate negative information on your credit report, such as late payments or bankruptcies, cannot be removed by credit repair companies.
These credit repair companies may assist with disputing inaccuracies and errors on your credit report, but they cannot erase accurate data.
It’s essential to be cautious when engaging with credit repair services and focus on addressing legitimate concerns through proper channels, such as disputing inaccuracies directly with credit bureaus.
Myth 8: Joint Accounts Combine Credit Histories
Why the Myth Exists:
In a joint account, In a joint account, both account holders are responsible for the debt.
This shared responsibility might lead individuals to believe that their credit histories are automatically combined.
Debunking the Myth:
While joint account activity appears on both individuals’ credit reports, credit histories remain separate. Each individual’s credit score is based on their own financial behavior and credit history.
Joint accounts can influence both parties’ credit reports, particularly if there are missed payments or high balances, but the credit histories themselves do not merge.
It’s essential for individuals with joint accounts to communicate and manage the account responsibly to avoid any negative impact on their individual credit scores.
Myth 9: High-Income Guarantees Approval
Why the Myth Exists:
Limited financial education or understanding of credit evaluation criteria may contribute to the belief that a high income is the primary determinant for credit approval.
There is a common assumption that individuals with high incomes are financially stable and less likely to default on loans.
Debunking the Myth:
Lenders consider various factors when assessing creditworthiness, and income is just one of them.
While a high income can be a positive factor, it does not guarantee approval. Lenders also evaluate credit history, debt-to-income ratio, employment stability, and other financial aspects.
A high income may increase the likelihood of approval, but it is not the sole determining factor. Responsible credit management and a strong credit history play crucial roles in the approval process.
Myth 10: You Only Have One Credit Score
Why the Myth Exists:
Many individuals may primarily interact with a single credit scoring system, such as FICO or VantageScore. This limited exposure may lead to the assumption that there is only one universal credit score.
Debunking the Myth:
There are multiple credit scoring models. Each model may produce a different credit score based on the information available in your credit report.
Lenders may use different scoring systems depending on their preferences.
It’s essential to be aware of this diversity and understand that you may have different credit scores depending on the scoring model used by a particular lender.
Myth 11: Credit Scores Reflect Job Stability
Why the Myth Exists:
People may associate job stability with financial stability.
The assumption is that individuals with secure, stable employment are less likely to face financial difficulties and, consequently, are more likely to have higher credit scores.
Debunking the Myth:
Your employment status is not a factor in your credit report or credit score. While losing a job may impact your ability to make timely payments, it doesn’t have a direct effect on your credit score.
Credit scores focus on your credit history, payment behavior, credit utilization, and other financial factors.
It’s crucial to manage credit responsibly, regardless of employment status, to maintain a positive credit history.
Myth 12: Bankruptcy Ruins Your Credit Forever
Why the Myth Exists:
Bankruptcy is often associated with financial hardship and failure. The emotional impact of declaring bankruptcy may lead individuals to believe that their credit is permanently damaged.
Debunking the Myth:
While bankruptcy has a significant and lasting impact on your credit, it is not a permanent stain. The effect diminishes over time, and you can actively work towards rebuilding your credit after bankruptcy.
Responsible financial habits, such as making timely payments and managing credit responsibly, can gradually improve your credit score.
Lenders may also consider recent positive financial behavior when evaluating creditworthiness, providing opportunities for credit recovery.
Myth 13: A Good Credit Score Guarantees Loan Approval
Why the Myth Exists:
Some financial institutions or lenders may use messaging that implies a strong focus on credit scores in their marketing materials.
This messaging may contribute to the belief that a good credit score is the sole determinant of loan approval.
Debunking the Myth:
While a good credit score significantly improves your chances of loan approval, it does not guarantee it.
Lenders consider various factors, including income, debt load, employment history, and the type of loan you’re applying for.
Your credit score is just one part of the overall assessment of your creditworthiness.
It’s crucial to maintain a well-rounded financial profile and demonstrate responsible financial behavior beyond just having a good credit score.
Myth 14: Credit Scores Discriminate Based on Age
Why the Myth Exists:
The myth that credit scores discriminate based on age might exist due to the confusion between an individual’s age and the concept of “credit age.”
Credit age refers to the average age of an individual’s credit accounts, not their chronological age.
Individuals may not fully grasp that credit scoring models consider the length of time specific credit accounts have been open.
Consequently, someone with a longer credit history may have a higher credit score due to the positive impact of a more extended credit age.
Debunking the Myth:
Credit scores are calculated based on an individual’s financial behaviors and credit history, not their age.
Factors such as payment history, credit utilization, length of credit history, types of credit in use, and new credit applications are considered.
Myth 15: Co-Signing Doesn’t Affect Your Credit
Why the Myth Exists:
The primary borrower’s name is often associated with the loan, and the co-signer’s role may be perceived as secondary.
This could lead to the misconception that the co-signer’s credit is not directly affected by the loan.
Debunking the Myth:
As a co-signer, you share responsibility for the debt, and it can impact your credit if payments are missed.
The loan appears on your credit report, affecting your credit history and potentially your credit score.
Co-signing is a significant financial commitment, and it’s essential to understand the potential consequences before agreeing to take on this role.
Communication with the primary borrower and a clear understanding of the financial arrangement is crucial to managing the impact on both parties’ credit.
Myth 16: Credit Counseling Hurts Your Credit Score
Why the Myth Exists:
Credit counseling is often confused with debt settlement programs, which can have a negative impact on credit scores.
In debt settlement, a consumer negotiates with creditors to pay less than the full amount owed, and this process can be reported on credit reports, negatively affecting credit scores.
People may incorrectly associate credit counseling with such negative consequences.
Debunking the Myth:
While enrolling in a credit counseling program may initially have a small impact, it is generally less damaging than late payments or bankruptcy.
Credit counseling focuses on creating a structured plan to repay debts, which can be viewed positively by lenders.
The impact on your credit score is often temporary, and as you make consistent payments through the program, it can lead to credit score improvement over time.
Myth 17: Only Rich People Have High Credit Scores
Why the Myth Exists:
High-income individuals may be perceived as having better access to credit and the ability to meet financial obligations.
This perception can lead to the assumption that wealthier people naturally have higher credit scores.
Debunking the Myth:
Credit scores are based on credit behavior, not wealth. While income may influence certain aspects of credit applications, the core elements of credit scores are focused on how well an individual manages credit, pays bills, and handles debt.
Individuals with various income levels can achieve and maintain high credit scores through prudent financial management.
Myth 18: Student Loans Don’t Affect Credit Until Graduation
Why the Myth Exists:
Many student loans offer a grace period, which allows students a time after graduation before they are required to start making payments.
During this time, borrowers may mistakenly believe that their student loans are not impacting their credit because payments are not yet due.
Debunking the Myth:
Student loans can impact your credit as soon as they are taken out. The amount borrowed contributes to your overall debt, and the utilization of credit is a factor in your credit score.
Even if you’re not required to make payments while in school, the presence of the loan on your credit report can influence your creditworthiness.
Responsible management of student loans, including making timely payments after graduation, can positively impact your credit history.
Myth 19: Paying Cash Builds Credit
Why the Myth Exists:
The myth that paying cash builds credit exists because of the association between physical, tangible actions, and financial responsibility.
Some individuals may believe that the act of physically handing over cash for purchases symbolizes a responsible and disciplined approach to spending, and they may extrapolate this behavior to creditworthiness.
Debunking the Myth:
Cash transactions do not contribute to your credit history or score. Credit activity, such as using credit cards or taking out loans, is necessary to establish and maintain good credit.
Responsible use of credit, including making timely payments and managing credit accounts effectively, positively influences your credit history.
Using cash for transactions, while a good financial practice in certain situations, does not impact your credit score.
Myth 20: Credit Scores Consider Ethnicity or Religion
Why the Myth Exists:
Historical instances of discriminatory lending practices, where certain groups faced unfair treatment, contribute to concerns about potential biases in credit scoring.
Debunking the Myth:
Credit scores are based solely on financial behaviors and credit-related information.
Ethnicity, religion, gender, and similar personal characteristics are not considered in credit-scoring models
The focus is strictly on your financial habits and credit management.
Myth 21: Married Couples Share a Credit Score
Why the Myth Exists:
Married couples often share financial responsibilities, including joint bank accounts, mortgages, and other loans.
This shared financial life may lead individuals to assume that credit scores are combined or shared as well.
Debunking the Myth:
In reality, credit scores remain separate for each individual, even after marriage. Each person’s credit score is based on their own credit history and financial behaviors, not that of their spouse.
Therefore, each spouse maintains their own individual credit score. However, joint accounts, shared loans, and other financial activities conducted together can impact both individuals’ credit histories.
It’s important for married couples to communicate about their financial goals, manage joint accounts responsibly, and be aware of the potential impact on individual credit scores.
Myth 22: Credit Scores Are Only Based on Debt
Why the Myth Exists:
The myth that credit scores are only based on debt exists because of a common tendency to oversimplify complex financial concepts.
Debt is a highly visible and widely discussed aspect of personal finance, and it often carries negative connotations.
As a result, people may gravitate toward the idea that credit scores are solely determined by the amount of debt an individual carries.
This oversimplification can be perpetuated by media portrayals, financial advice that emphasizes debt reduction, and a general association between financial responsibility and being debt-free.
Debunking the Myth:
Credit scores consider various factors beyond just debt. While debt-related factors like credit utilization are important, credit scores also take into account payment history, the mix of credit types, and the presence of new credit accounts.
A positive credit history involves responsibly managing various aspects of credit, not just the presence or absence of debt.
Maintaining a diverse and positive credit profile is key to achieving and maintaining a good credit score.
Myth 23: Credit Bureaus Create the Credit Score
Why the Myth Exists:
Individuals often receive their credit scores along with their credit reports.
This simultaneous presentation creates an association between the two, leading to the misconception that credit bureaus, responsible for credit reports, also generate credit scores.
Debunking the Myth:
It is important to remember that credit scores are not the proprietary products of credit bureaus.
Instead, they are outcomes of analytical models developed by separate entities—FICO and VantageScore.
Understanding this distinction helps individuals recognize the external origin of their credit scores.
Myth 24: Credit Scores as Inherent Parts of Credit Reports
Why the Myth Exists:
Service providers and credit monitoring agencies frequently bundle credit reports and credit scores together.
This bundling, while convenient, may unintentionally contribute to the belief that the credit score is a fundamental aspect of the credit report rather than a separate numerical representation.
Debunking the Myth:
Contrary to the myth, credit scores are not inherent parts of credit reports. The credit report, obtained from credit bureaus, provides a detailed history of an individual’s credit-related activities.
However, the credit score is a separate entity that may be purchased alongside the credit report.
Myth 25: Calculating a Credit Score Is Simple
Why the Myth Exists:
The oversimplification of credit score calculation often likened to basic arithmetic, contributes to this myth.
Graphs simplifying the process may mislead individuals into thinking that determining a credit score is straightforward.
Debunking the Myth:
In truth, calculating a credit score involves complex algorithms and considers thousands of data points.
Comparing credit scoring to basic arithmetic doesn’t really cover how detailed and complicated it actually is.
It’s more like putting together a complex puzzle with many pieces. When you grasp this complexity, you can better see that your credit score is affected by various factors.
Instead of worrying about small changes, it’s more important to look at the overall picture.
Myth 26: You Start with Good Credit and Lose It with Mistakes
Why the Myth Exists:
There’s a common misconception that everyone begins with good credit by default.
Individuals might assume that having no credit history means starting with a positive credit standing until proven otherwise.
Debunking the Myth:
Credit scores are built over time as an individual’s credit history grows. Positive information contributes to an increased score, while negative information, such as missed payments or defaults, can decrease it.
Recognizing that credit scores are dynamic and responsive to financial behavior dispels the notion of credit being easily lost.
Credit Myths FAQs
1. What is the paradox of credit?
The paradox of credit is the idea that, to build a positive credit history, responsible credit use is necessary.
However, using credit irresponsibly can lead to accumulating debt, creating a challenging situation.
2. Why is credit a trap?
Credit can become a trap when misused, leading to borrowing beyond one’s means.
High-interest rates and fees can accumulate, fostering a cycle of debt that can be difficult to break free from.
3. What is a history of bad credit?
A history of bad credit involves consistently failing to meet credit obligations, such as late payments or defaults.
These negative actions are recorded in the credit report, making it challenging to qualify for loans or obtain favorable interest rates.
4. What is the secret to credit?
The secret to good credit lies in practicing responsible financial behavior. This includes paying bills on time, using credit wisely, and effectively managing debt.
5. What are the 5 keys of credit?
- Paying bills on time
- Using credit wisely
- Keeping credit card balances low
- Regularly checking your credit report
- Avoiding opening too many new credit accounts at once
6. What is the 15 3 credit hack?
The term “15/3 credit hack” is not widely recognized. It’s essential to be cautious of supposed credit hacks and focus on established principles of responsible credit management.
7. How to get a 0 credit score?
Achieving a 0 credit score is not a common goal, as it signifies having no credit history. To establish credit, consider starting with a secured credit card or a credit-builder loan.
8. How to get a 100% credit score?
Credit scores are not represented as percentages. Aim for a high numeric credit score by practicing responsible financial habits.
9. Who can carry a black card?
Black cards, often associated with luxury, are typically invitation-only and offered to individuals with high income and an excellent credit history. Examples include the American Express Centurion Card.
10. What is a perfect credit score?
A perfect credit score is usually considered to be 850, although it’s exceptionally rare. Having a score in the high 700s or 800s is generally considered excellent.
11. How can I get credit fast?
Building credit takes time, but you can start by obtaining a secured credit card, becoming an authorized user on someone else’s credit card, or applying for a credit-builder loan.
12. How to get a perfect credit score?
To improve your credit, focus on the 5 keys of credit, including paying bills on time, reducing credit card balances, and managing credit responsibly.
13. How to get 999 credits?
As mentioned earlier, credit scores typically max out at 850. Aim for a high score by practicing good financial habits over time.