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3 Credit Myths Common to Everyone Which could harm your credit score
A NerdWallet study finds that Americans aren't aware of the basics of 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 financial matters, credit cards, investments, travel, as well as student loans. She loves numbers and aims to simplify data sets in order to help people improve their financial lives. Prior to becoming a Nerd during 2014, she worked as a tax accountant and freelance personal financial writer. Erin's work has been mentioned in The New York Times, CNBC as well as on the "Today" program, Forbes and elsewhere. In her spare time, Erin reads voraciously and tries in vain to keep up with her two kids. She is based in Ypsilanti, Michigan.
Published Oct 4 2022 at 6:00AM PDT
Written by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. Previously, she spent 18 years at The Oregonian in Portland in roles including copy desk chief and team leader for design and editing. Prior experience includes news and copy editing for a variety of Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in journalism and mass communications in Iowa's University of Iowa.
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The spread of financial misinformation is afoot and could be hurting your credit score. Finds that Americans hold many misconceptions about their credit scores, some of which could seriously damage their scores. Here are three common credit score myths and how to ward off them.
Myth 1. Leaving a open balance with your credit card good for your score
It's a common credit myth The majority of Americans (46 percent) think leaving the credit card balance is more beneficial for their credit rating than doing it total, as per the survey. However, carrying a balance won't help your credit and can even be detrimental when the balance represents a large percentage of your credit limit. This is because it can increase the amount of credit you use (the quantity of the credit limit that you use), which significantly influences your credit score.
Another downside to leaving the credit card comes from the cost of interest. Credit card debt, which you have in the event that you make a mistake and leave an unpaid balance on your credit card, even if intentionally -is among the most expensive forms of debt because of double-digit interest rates. Although you may think leaving a small balance on your card wouldn't be as costly, it could be because of .
If you fail to pay your entire balance by the due date, interest will be assessed, but not just on the remaining balance. It's instead calculated according to the average daily balance of your card. So if you leave the balance at $10 on your credit card, however, your average balance on your card for the month was $1000 and the interest rate is based on the balance of $1,000.
It is possible to combat this by paying off the balance on or before the due date, which may lower your credit utilization and the cost of your monthly payments.
Myth 2. Closing a credit card you don't need is beneficial for your credit
The survey revealed that almost half of Americans (46%) think closing a credit card that they don't use is beneficial to improve their score on credit. The idea of keeping a financial product you aren't using seems counterintuitive however closing a credit card can damage your score.
Closing a card may ding your credit score due to the amount of credit you use. While there are a few some reasons, generally speaking use credit, it's not enough to suffer the financial burden.
Even if you don't cancel your credit card, the credit card issuer will eventually close any account that isn't being utilized for a specific period of time. To avoid this it is possible to charge small, recurring expenses- like an annual subscription to your card and create autopay to wipe off the balance of your credit card each month.
Myth 3. Credit checks won't hurt your credit score
A majority of Americans (28 percent) do not realize that a lender conducting a credit inquiry can make their credit score decrease, as per the survey. There are two kinds of credit checks: the hard inquiry and the soft inquiry. When you check your credit it's a gentle inquiry that doesn't impact your score. But when an lender assesses your score to determine whether you're creditworthy for a loan that's a "hard inquiry" and your score could be lowered.
There are exceptions. For instance, for certain financial products, like auto or mortgage loan multiple inquiries in a short period can be considered an individual hard inquiry. The amount of time varies according to the credit scoring model however, it is recommended to make all requests within a two-week period. This is known by the term "rate shopping" and lets you shop around to find the most advantageous loan conditions.
However, applying for more than one credit card in a short period doesn't fall under rate shopping and will lead to the issue of a hard inquiry for each application. This is why keeping a limit on the number of applications you make is a good idea. Hard inquiries can stay in your credit file for a period of two years. So, prior to applying for an additional credit card, ensure that it's accessible to people in your credit score range.
Author bio Erin El Issa is a credit cards expert and writer on studies at NerdWallet. The work she has written for NerdWallet was highlighted on USA Today, U.S. News and MarketWatch.
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