Your financial health is made up of a combination of credit history, credit reports, and credit scores. You know you need a good credit score so you can get financing for big-ticket items like a car or house. And one thing that helps improve your credit score is paying your credit cards and/or debt in a timely, reliable fashion. But will missing one payment damage your score? What about having two or three credit cards vs. just one? Many myths abound about what can impact your credit score, and thanks to the wisdom Erin Lowry shares in her book Broke Millennial, we can help you bust them.
MYTH: Checking my credit report will hurt my score.
False. Checking your credit report will not harm your credit score. In fact, it’s smart to stay informed on your credit status. According to the law, at least once a year, you can get FREE credit reports from each of the three credit bureaus (Experian, TransUnion, and Equifax). You can get these reports by going to the government-endorsed website annualcreditreport.com.
YOU checking your credit report won’t affect your credit score, but when you apply for credit (which includes credit card applications, mortgages, auto loans, student loans and personal loans), you could get a hard inquiry on your credit report when THEY check your report. A hard inquiry note is when lenders check your credit, and if you have a number of people checking your credit within a short time, it can slightly lower your score.
MYTH: A potential employer can check my credit score.
Nope. Your potential employer can’t check your credit score, but they can run a credit report (and only with your permission). However, what they get is a truncated version of your actual report and it will not include your credit score. It’s also good to know that an employer vetting your credit does not count as a hard inquiry and will not affect your credit score.
MYTH: I should carry a balance month to month on my credit card.
Absolutely not. You should always pay your credit card bill on time and in full. Leaving a balance on your credit card only means you will be paying interest on that amount to the bank. You want your credit card to show a small charge and then when the bill comes, you pay it off on time and in full. That way you can prove you can handle using a credit card.
Paying your credit card bill too early is almost as bad as paying it late. You should utilize no more than 30% of your available credit limit and then pay it off in full when the bill is due. If you have a $2,000 limit on your credit card and you make a purchase on that card for $175, then when the bill comes and is paid in full, you are not charged any interest and are credited for using 9% of your available credit. If you had paid off the bill before the end of the billing cycle, then you would have gotten a credit card bill saying you owed $0 and those looking at your credit report will think you haven’t used your credit card at all.
MYTH: It’s good to max out my credit card or get close to the limit.
Similar to the myth of carrying a balance, some credit card users believe it shows more responsibility to use as much of the credit limit as possible. You should keep your utilization at 30% or less. If you start utilizing nearly 100% of your credit limit, it is going to sink your credit score.
MYTH: Just use a prepaid card or a debit card.
Prepaid cards and debit cards are not reported to the credit bureaus, so they can’t help you establish and build a credit history. Having a strong credit score is like having an insurance policy. You don’t want to use it, but it can help prevent a world of financial pain when you need it.
You should also be careful about where you swipe your debit cards and which ATMs you use. Debit cards leave you more vulnerable to thieves because people using skimmers (devices used to steal your card information) can gain direct access to your bank account. Credit cards, however, are not directly linked to your bank account, so they come with less risk.
MYTH: Don’t accept a credit limit increase.
This really depends on your ability to handle credit. A credit card company offers you a higher credit limit in the hopes that you will spend more money. They’re also hoping that when you spend more money, you won’t be able to pay off the total amount each month and will need to carry a balance and pay them interest on that balance. The increased limit will help boost your credit score even if you don’t end up spending more money. If you tend to overspend on your credit cards, then don’t take the risk of an increased line of credit that could lure you into debt.
MYTH: Never close your oldest credit card.
So, you’re thinking about closing that old credit card that you used to gain access to cards with better rewards and higher credit limits. You’re wondering if closing it will mean you’ll lose all those years of positive history and perhaps even reduce your average length of credit history. (And credit history makes up 15% of your credit score.) There’s two ways to approach this issue:
- Keep the card and just use it to pay a small monthly charge (like a Netflix monthly bill) and have it set to automatically pay off.
- Close the card if a potential small dip in your credit score won’t be a big deal because you have so many years of healthy credit history with other cards and lines of credit. You should only go this route f your credit score is well into the 700s.