3 Big Myths That Can Hurt Your Credit
Let's face it, there is a lot of bad information floating around the internet about the subject of credit. Credit myths abound and blindly following information or advice from someone who is not truly qualified to give credit advice can cause some serious damage to your credit scores - not to mention it could cost you a lot of money. Even many financial "gurus" give alarmingly bad advice on their television programs, radio shows, and in books which can backfire on the consumers who follow the bad advice. Here are 3 big credit myths which you need to be aware of in order to avoid getting burned.
Myth #1: Closing Unused Credit Cards Will Help Your Credit Scores
Closing unused credit cards can potentially cause your credit scores to take a nose dive, though perhaps not for the reason you may think. You may have heard the idea that closing a credit card account causes you to lose the value of the age of the account, thus lowering your credit scores. Thankfully for consumers, this idea is a complete myth. Closing credit cards does NOT cause you to lose the value of the age of the card (at least not until the card has been closed for a full 10 years). In fact, closed credit card accounts even continue to age on your credit report.
However, closing a credit card account does have the potential to have a negative impact upon your balance to credit limit measurements - aka your revolving utilization ratio. When you close a card you no longer have access to the credit limit on the account. Therefore, especially if you owe a balance on the card which you close, it will appear to the credit bureaus that you owe more than you are authorized to use on the card which will have a very bad impact upon your credit scores.
Even if you do not owe money on the card you close it could still very likely harm your scores to close the account. Credit scoring models also care about your aggregate revolving utilization ratio (the relationship between the balances on all of your credit cards and the limits on your open credit cards). Closing an unused credit card will cause the limit on that account to no longer be included in the calculations for your aggregate revolving utilization ratio thus raising your aggregate utilization ratio if you have a balance on any credit card account. If your aggregate utilization ratio goes up, your scores will almost certainly go down.
Myth #2: You Should Carry a Balance On Your Credit Cards
Many people believe that it is wise to carry a balance on your credit cards from month to month in order to earn higher credit scores. This is another stubborn credit myth which simply refuses to die. In reality, credit scoring models reward consumers who do not carry any debt, especially those who carry zero credit card debt.
Having open credit cards on which you do not revolve balances from month to month is a huge plus in the credit score department. Consumers who only charge what they can afford to pay off on a monthly basis show the credit scoring models that they are responsible and a low credit risk for future lenders. Plus, as an added bonus, consumers who pay off their credit card balances every month do not waste a lot of money on interest fees.
Myth #3: Checking Your Credit Reports Will Lower Your Credit Scores
Whenever you or anyone else obtains a copy of your credit report a record of the credit pulled, known as an inquiry, is placed on your credit report. Some inquiries do have the potential to lower your credit scores, but when you pull a copy of your own credit report it is impossible for that inquiry to harm your scores. In fact, if you wish you can check your own credit reports and credit scores 500 times a day and it will not harm your scores in anyway whatsoever.
It is wise to be very selective about allowing a lender to pull your credit reports so that you do not have an excessive number of "hard" inquiries which do have the potential to lower your scores. However, you should never feel nervous to check your own credit reports and scores. Don't forget, every consumer has the right to access a free credit report from each of the 3 credit bureaus annually at annualcreditreport.com. If you want to access your credit scores from though, it will cost you a separate fee from each credit bureau. Check out GreatCredit101.com for cheaper options to access all 3 of your credit scores.
Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.