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3 Credit Myths Common to Everyone Which could harm your credit score
A NerdWallet study finds that Americans have misconceptions about credit, which could affect your credit ratings.
By Erin El Issa Senior Writer | Personal finance, data analysis credit card Erin El Issa writes data-driven studies about personal finance, credit cards, investment, travel, banking as well as student loans. She is a fan of numbers and hopes to make data sets understandable to help consumers improve their finances. Before she became a Nerd in 2014, she was a tax accountant and freelance personal financial writer. Erin's work has been mentioned as a result by The New York Times, CNBC, The "Today" program, Forbes and elsewhere. In her free moment, Erin reads voraciously and is unable to keep up with her two kids. Erin is from Ypsilanti, Michigan.
Published Oct 4 2022 at 6:00AM PDT
Written by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years at The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Previous experience included copy editing and news for various Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in mass communications and journalism at Iowa's University of Iowa.
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The spread of financial misinformation is afoot and is hurting the credit rating of your. Finds that Americans hold many misconceptions about their credit, some of which can seriously harm their credit scores. These are three credit score myths and ways to avoid them.
Myth 1. Leaving a open balance with your credit card good for your score
This is a sticky credit myth The majority of Americans (46 percent) think leaving an unpaid balance on their credit card is better for their scores than having it paid in total, as per the survey. However, carrying a balance won't aid your credit score and may actually be harmful in the event that the balance is more than your credit limit. This is because it can increase your credit utilization (the quantity of the credit limit in use) and can negatively impact your credit score.
Another downside to leaving an unpaid balance on your credit card is the expense of interest. Credit card debt, that you incur in the event that you make a mistake and leave the card in a state of balance even if you do it intentionally- is one of the most expensive forms of debt because of double-digit interest rates. And while you might think leaving a small balance on your credit card isn't that costly, it can be due to .
If you don't pay off your entire balance before the due date, interest is assessed, but not just on the balance remaining. It's instead calculated on your average balance per day of the credit card. For instance, if you have the balance at $10 in your account, however your average balance on your card during the month was $1,000, interest is charged on the balance of $1,000.
It is possible to combat this by paying off the balance on or before the due date. This can reduce your credit utilization and the cost of your monthly payments.
Myth 2. The closing of a credit card that you don't need is beneficial for your credit
The study found that almost half of Americans (46%) believe that closing a credit card they do not use will help improve their score on credit. Keeping a financial product you're not using is a bit counterintuitive, but closing a credit card can affect your score.
The closing of a credit card could hurt your credit score, by increasing your credit utilization. There are many motives to do so, in general use credit, it's not enough of a reason to suffer the financial burden.
Even if you don't cancel your credit card, the credit card issuer will eventually shut down any account that's not utilized for a specific period of time. To avoid this, you can charge small, recurring expensesfor example, a monthly subscription -- to the card , and set up autopay to wipe off the balance of your credit card each month.
Myth 3. A credit check won't impact your credit score
A majority of Americans (28 percent) do not realize that an lender running a credit check could cause their credit score to decrease, as per the survey. There are two types of credit inquiries, a hard inquiry and a soft inquiry. When you check your credit it's considered a soft inquiry that doesn't impact your score. But when you are asked to provide a lender assesses your score to determine whether you're creditworthy for a financial product this is a , and your score could go down.
There are exceptions. For example, for certain financial products, such as auto or mortgage loan, several inquiries made in a short time period count as a single hard inquiry. The amount of time varies depending on the credit scoring model used It is generally safe to submit all applications within a two-week period. This is referred to as "rate shopping" and allows you to search for the most favorable loan terms.
However the process of applying for more than one credit card in a short amount of time does not fall under rate shopping and could result in a hard inquiry for each application. Therefore, keeping a limit on the number of applications you file is a good option. Hard inquiries will remain at the top of your credit score for a period of two years, so before applying for another credit card, ensure that you're with credit scores in your range.
Author bio Erin El Issa is an expert in credit cards and studies writer at NerdWallet. Her work has been highlighted on USA Today, U.S. News and MarketWatch.
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