5 common credit myths, busted

When it comes to debt, credit reports, and credit scores, conventional wisdom is peppered with myths, misunderstandings, and misrepresentations. And if you’re one to search the Internet for answers about your credit report, you’ll likely find more fiction than facts.

What’s true: A good credit score may mean low interest rates on things like a mortgage, auto loans, and credit cards. On the flip side, a bad credit score might mean that you’ll get a higher interest rate or lower initial credit lines, and landlords and utility companies might ask you for higher security deposits. And some organizations won’t hire you if you have bad credit.

It’s therefore more important than ever to monitor your credit. According to the 2018 Capital One Credit Protection & Security Survey, more than half of respondents (nearly 55 percent) have experienced financial theft or fraud. Of those respondents who have experienced fraud, 37 percent reported loss of money, and 25 percent reported a negative financial impact.

Below, we debunk the most common myths to help you keep an eye on your credit — and raise your score.

Reality: While a “hard” inquiry for credit card applications or credit checks from a bank or auto dealership can cause a dip in your score, “soft” inquiries, such as checking your own credit score through credit monitoring tools, will not affect it.

Pro tip: It’s best to check your credit reports at least once a month. You can visit www.annualcreditreport.com to request a free copy of your credit report every 12 months from each of the major national reporting companies: Equifax, Experian, and TransUnion®. However, you can also check your VantageScore® 3.0 credit score as often as you like by using CreditWise® from Capital One®, a free credit monitoring tool for everyone to use, even if you’re not a Capital One customer. It’ll also alert you if anything meaningful changes on either your Experian or TransUnion credit reports.

Reality: If you routinely pay just the minimum (and not the full balance), it could hurt your credit score. If you’re only paying the minimum, particularly on a high-interest card, while you’re still using it to incur new charges, it’ll take longer to pay off outstanding balances. And higher balances could also increase your credit utilization, the ratio of your outstanding balances to your credit card limit. Avoid exceeding your credit limit and try to keep your balances at or below 30 percent of your credit limit for all open cards, even if you pay off your bill in full every month. If you start getting near your credit limit, this can be a red flag to potential lenders, suggesting you’re maxing out your cards.

That’s what happened to Alexandra T. from Seattle. “When I was in college, I racked up $4,000 worth of credit card debt and only paid the minimum,” she says. To help improve her score, she uses auto-pay to make sure she never misses a payment, and she always makes sure to pay the entire balance. Now her score is up more than 150 points.

Pro tip: “Everyone should strive to pay their credit card bill in full and on-time every month to build and protect their credit score,” says Chris Gatz, head of CreditWise. “If you must carry a balance, you should make your payments on time, make at least the minimum payment on your card each month, and pay more than the minimum when you can,” he says.

Reality: A credit score can be rebuilt over time. The longer a credit history is without negative information, such as late payments, the better. The older negative information is, the less significant it becomes. For instance, Jeff P. of St. Louis filed for bankruptcy a decade ago. Slowly but surely, he was able to rebuild his credit by working with his local bank, opening small lines of credit ($500 to $1,000) and making payments on time. After enough time had passed, he was able to finance a car and secure a small business loan.

Pro tip: “Scores can be improved by focusing on healthy credit habits, such as making your payments on time, every time,” says Gatz. CreditWise provides users with information that may help improve their score and shows different scenarios to see how certain actions, like if you cancel older lines of credit or if you have late payments, affect your score.

Reality: Mistakes on credit reports can happen, and if there is a mistake on yours, it could be negatively affecting your credit score. If you have a question about a charge or a concern about your credit report, contact the reporting agency immediately.

Pro tip: Check your credit report. Once a year, you can get a free copy of your credit report from the three major bureaus (Experian®, Equifax®, TransUnion®) at www.annualcreditreport.com. It’s important to review all three reports — some lenders don’t report to every bureau, so they may have different information. You can also check your TransUnion credit report for free anytime by using CreditWise. Getting your score through CreditWise won’t hurt your score, and it allows you to stay up to date with changes to your credit score through email alerts and push notifications.

Reality: It is very important to pay your bills on time every month. Make it a priority to never skip payments. This shows lenders you are responsible and trustworthy. Part of your credit score depends on how timely you are with bill payments.

Pro tip: If you are delinquent on any payments, it could show up negatively on your credit report. Therefore, it’s important to pay all bills on time.

It’s easy to be fooled by the credit myths you read online, but the right tools can help you understand how to monitor your credit score and empower you to take control of your finances.

Credit reporting agencies each use their own proprietary models for calculating scores, and many factors can influence your credit score.