Credit scores are an area of personal finance that seem a lot more mysterious than they actually are. Here we clarify four common credit score myths.
Myth 1: You have no control over your credit score
There are a lot of factors that make this myth easy to buy into. For example, credit bureaus keep their exact credit score formulas a secret, you can’t access your credit report whenever you’d like online without paying a fee, and it’s possible to be financially stable and still have a miserable score. But your credit score is a reflection of your borrowing and repayment behaviours, so you actually have a lot more control over it than you think.
Myth 2: There’s a “quick fix” for your credit score
Unfortunately, boosting your credit score doesn’t happen overnight. The good news is that the things you can do to positively influence your score are simple and don’t require a lot of time or effort. But you’ll have to be patient while waiting for your new good credit habits to take effect. Your credit score is more of a track record than a snapshot, so consistency is key.
Myth 3: Checking your credit report will negatively affect your score
This myth comes from confusing two different types of credit score inquiries:
- Hard inquiries – made by lenders or credit card companies when you apply for a new line of credit (a loan, a new credit card or a mortgage, for example).
- Soft inquiries – made by you or by others for background check purposes (a potential employer or landlord, for example).
Because hard inquiries suggest you might be taking on more credit soon, they usually lower your score by a few points. Soft inquiries, on the other hand, do not affect your credit score in any way.
Myth 4: Opening or closing a bunch of credit cards will improve your score
Opening new credit cards gives you more available credit, which in turn lowers your credit utilization ratio – the amount of your available credit you actually use each month. While lowering this ratio is a good thing, opening a bunch of new credit cards means a sudden increase in the number of hard inquiries. Each hard inquiry docks a few points from your score. And if many are made within a short amount of time, it makes you look risky, which can further influence your credit score in a negative way.
So then closing a bunch of accounts must be the way to go, right? Not quite. Depending on the accounts you close, you could unintentionally be raising your credit utilization ratio and shortening the overall length of your credit history. Both of these consequences lower your credit score.
The best approach is to space out any credit account openings or closings. Try to time them in a way that any short-term negative impact on your credit score won’t interfere with an important upcoming car loan or mortgage. Do your research, only apply for credit products you need and understand what a specific credit card is contributing to your score before making the decision to close it. For example, that first college credit card may have a low limit and no rewards, but if it’s adding a few years on to your credit history, it may be best to keep it in rotation.