Sometimes the best of intentions can lead to the worst results — especially by following bad but well-intentioned advice on how to improve your credit score.
While not meant to be bad advice, some widely held thoughts on improving credit are actually credit card myths that could hurt your credit score more than help it. Some credit card myths are just downright odd.
Here are 11 credit card myths that we’ve debunked so they don’t hurt your credit score:
1. Canceling credit cards boosts my credit score
At face value, doing this makes sense. Getting rid of debt and then cutting up your credit cards and canceling them can serve as a final act of victory.
But it doesn’t work that way, says Thomas Nitzsche, a spokesman for ClearPoint Credit Counseling Solutions. While it can be psychologically therapeautic, closing the account actually damages the credit score, especially if it’s one with a long, good payment history, Nitzsche says.
Canceling credit cards can hurt a credit score by a few points decreases your debt-to-available credit ratio, says Leslie Tayne, a financial attorney and debt specialist.
“The more cards you close in a short period of time, the bigger drop you are likely to see in your credit score,” Tayne says.
2. Too many inquiries hurt
“While a lot of inquiries can drop your score a few points, this phenomenon is largely inflated,” Nitzsche says. “Most scoring models actually allow inquiries within a certain timeframe to just be considered one inquiry.
“The reason for this is that, for example, when shopping for a car the dealer is likely to try to get you financed with multiple banks. It would be unfair for the consumer to be dinged for this. If you have credit with a company, their risk management department pulls your credit regularly to check on your financial health with no change in score,” also called a “soft pull.”
3. Checking my own credit report harms my standing
Checking your own score is considered a “soft pull,” which doesn’t damage your credit standing, he says.
Most consumers who visit the credit counseling service don’t check their report regularly and aren’t aware of the free site annualcreditreport.com where they should go at least annually to review their credit, Nitzsche says.
4. Paying on time each month results in good credit
This is another case where a debt utilization ratio comes into play for your credit score. The idea that simply paying your credit card bill on time every month will give you good credit isn’t necessarily true, says Michael Mack, an attorney and credit card expert who started a foundation called BankFound.org to help people recover from bankruptcy.
[pull_quote align=”left”]”If your utilization is high, then you can have a FICO score drop like a rock. Utilization is the ratio of credit limit to balance,” says Michael Mack, founder of BankFound.org.[/pull_quote]”If your utilization is high, then you can have a FICO score drop like a rock,” Mack says. “Utilization is the ratio of credit limit to balance. I can’t tell you the amount of times people have consulted with me thinking their credit was ‘good,” only to be shocked by a low credit score because their revolving (credit card) debt was high in relation to credit limits. Ideal utilization is 9% or lower: for average and individual utilization.”
A credit card utilization calculator can help determine your ratio so you can improve your credit score.
5. You must be in debt to have a good score
Not true, says Tayne, the financial attorney. A key factor that determines your credit score is your debt-to-available credit ratio, she says. If this is too high, your score will drop.
Another area that impacts a credit score is not whether you pay the balance off in full each month, but rather consistent on-time monthly payments, Tayne says. As long as you make your payments on time, you can maintain a great score with little to no debt.
6. FICO scores are locked in for six months
Credit scores can change monthly as the creditors update the status of your accounts each month, he says. There’s no way to know exactly when in the month the creditors report.
7. My debit card can’t affect my credit
While a debit card does not report to the credit bureaus, it can help or hurt you if it is tied to an overdraft line of credit, Nitzsche says.
An overdraft line of credit is basically a line of credit that is available in the event that you overdraw your checking account. If you dip below zero, the debit card will still work, but instead of drafting your checking account it will begin pulling on the line of credit.
If you fail to pay on the line of credit (most accounts are auto-paid for at least the minimum due, assuming you have enough money in your checking account by the billing date) or if you use up too much of the available credit, you can hurt your score.
In the same way, he says, if you carefully use the credit it can help you build good credit history. It’s also important to review your bank accounts carefully, says Nitzsche, who has seen clients completely unaware that they had maxed out their overdraft line of credit.
8. A secured credit card helps build credit
While a secured credit card can possibly help you build credit, it’s important to understand how they work and to be aware of their limitations, Nitzsche says.
[pull_quote align=”left”]Secured credit cards are not the same as a pre-paid credit card, which can’t help you build credit.[/pull_quote]Secured credit cards are also not the same as a pre-paid credit card, which can’t help you build credit, he says. Not all secured credit cards report to the credit bureaus, and generally even the ones that do don’t report to all the bureaus — Equifax, TransUnion, and Experian.
This is because it costs the creditor money to report to each bureau and, by definition, secured credit cards cater to sub-prime borrowers with low credit limits, which can limit the bank’s ability to make money.
It’s important to ask which, if any, credit bureaus the account will report to and to understand that the deposit you pay to secure the card is not the money you will “spend,” Nitzsche says. It’s just the security to hold the card, so you still have to pay the bill when it arrives.
9. I can’t build credit without having credit first
If you have no credit or bad credit, and thus no one will extend you credit, it can seem like there’s no way to get back in to the world of credit and improve your credit score. But it can be done, Nitzsche says.
Begin by reviewing your credit report for errors or items older than seven years that should be removed, he says. Then clean up any existing active lines of credit that are reporting, and then work to get new lines of credit reporting favorably.
A local bank or credit union can help you by opening a “credit builder loan” (sometimes called a “credit builder CD”) or a secured credit card.
10. Co-signing a loan won’t hurt as long as they pay
If you add yourself to someone’s loan on an amount large enough to affect your debt-to-income ratio, then you’re hurting your credit, Nitzsche says. If you need your own loan in the future, you may be unable to secure it if your credit shows too many other financial obligations.
The lender may or may not accept a letter stating that you do not pay the bill in order to get you qualified, but you’re still legally responsible, he says.
11. Pay off delinquent loan and it’s removed from credit report
If you’ve paid off a delinquent loan or credit card balance, you may think that it’s then removed from a credit report and will no longer affect your credit score. Wrong, says Becky Frost, a senior manager at Experian.
“Negative information such as late payments, collection accounts and bankruptcies will remain on a person’s credit reports for up to seven years,” Frost says. ‘Certain types of bankruptcies stick around for up to 10 years.”
Paying off the delinquent account won’t remove it from a credit report, but it will update the account to indicate it as “paid,” she says.
What other credit card myths would you like to see debunked? Let us know in the comments section below.