12 Credit Myths and Truths You Should Know

Building and maintaining great credit is an important part of your financial life. Excellent credit scores unlock a world of benefits including borrowing at low interest rates and paying less for insurance.

But there are loads of myths and misunderstandings about credit that can hurt your wallet. In this post, I’ll help you build the best credit possible with 12 credit myths and truths you should know.

12 Credit Myths and Truths You Should Know

1. Your personal information affects your credit. 
2. Your income affects your credit scores. 
3. Using a debit card helps build credit. 
4. Canceling credit cards boosts your credit. 
5. You share credit with a spouse. 
6. Kids can’t have a credit report. 
7. You must carry credit card debt to build credit. 
8. You only need good credit if you plan to carry debt. 
9. Every bill you pay helps build credit. 
10. Checking your credit hurts your score. 
11. You have one credit score. 
12. Closing a credit account erases its history.

Here’s more detail about each to help you build excellent credit.

Myth #1: Your personal information affects your credit.

Truth: If you’ve heard that credit scoring is discriminatory or uses information from your social media accounts, that’s dead wrong. Your credit scores are calculated using data in your credit reports with nationwide credit agencies, including Equifax, Experian, and TransUnion.

There is personal information in your credit reports, but it’s limited to your name, current and previous addresses, Social Security number, birthdate, and public information, such as a recorded lien or bankruptcy.

Your credit files never include your race, gender, marital status, education level, religion, political party, or income.

Your credit files never include your race, gender, marital status, education level, religion, political party, or income. Federal law prohibits credit scoring from taking those factors into account.

See also: 6 Steps to Build or Repair Your Credit Before Buying a Home

Myth #2: Your income affects your credit scores.

Truth: There’s no connection between how much you earn and your credit scores. Since lenders and credit card companies typically ask your income on a credit application, having a high income can work in your favor, but it’s just one way they evaluate you.

As I previously mentioned, your credit reports don’t include income and credit bureaus don’t have access to your income sources. You can have excellent credit scores no matter if you’re employed, unemployed, receiving government assistance, or how much or little money you make.

Of course, losing your job or business income could severely affect your ability to pay your bills on time, which is a major factor in your credit scores.

Myth #3: Using a debit card helps build credit.

Truth: Debit and credit cards look alike—but that’s where the similarity ends. While using a debit card is convenient for making everyday purchases, they don’t help you build credit because your bank activity isn’t listed on your credit report.

See also: How to Build Credit With a Secured Credit Card

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While using a debit card is convenient for making everyday purchases, they don’t help you build credit because your bank activity isn’t listed on your credit report.

Myth #4: Canceling credit cards boosts your credit.

Truth: Closing a credit card that you’ve had for several years or that has a high credit limit can hurt your credit, not help it. A major factor in your scores is how much you owe relative to your credit limits, known as your credit utilization ratio. So, reducing your available credit always works against you.

If you’re not using a card, a better option is to keep your account active by using it to make a small purchase a few times a year. The length of your credit history is also a factor; so, if you’re determined to get rid of cards, close the newest ones first and do it slowly over time.

Myth #5: You share credit with a spouse.

Truth: Your credit history and scores never get merged with someone else’s—even if you’re married. That’s why it’s important to build your own credit as an individual.

If you have a spouse with bad credit, that could affect your ability to get a joint loan or credit card, but it can’t taint your credit file. However, if you become an authorized user on someone else’s credit card, the payment history on that account may get reported on your credit file.

See also: 5 Lesser-Known Reasons Why Your Credit Scores Drop

Myth #6: Kids can’t have a credit report.

Truth: Kids shouldn’t have a credit report, but if they’ve become the victim of identity theft, or have been added to a credit card as an authorized user, they will. Parents should check by contacting each of the credit bureaus at least once a year and disputing any fraudulent activity. 

Children are an easy target for cybercrime, so be sure to never give your children’s Social Security numbers to any organization or person unless it’s required. If you must reveal it, ask if you can share just the last 4 digits.

Myth #7: You must carry credit card debt to build credit.

Truth: You never need to carry credit card debt to improve your credit. It’s true that you must have credit accounts and use them to build credit; however, you can pay them off in full each month. That’s the best strategy to avoid paying interest and build credit at the same time. 

If you do need to carry a balance from month to month, you can also build a positive credit history if you pay at least the minimum payment on time. So, go ahead and use a credit card or two—just make sure you pay it off every month.

See also: How Many Credit Cards Should You Have for Good Credit?

Myth #8: You only need good credit if you plan to carry debt.

Truth: Your credit affects your finances even if you never borrow money. It’s used as a tool to evaluate you and set rates for several different industries and products.

Depending on where you live, having poor credit means you could pay more than double what someone with excellent credit pays for insurance.

For instance, having black marks on your credit history could cause you to be turned down for a job. With your permission, a prospective or current employer can pull your credit report.

Having bad credit can keep you from getting approved to rent an apartment or home. It also means you may have to pay higher security deposits for power, cable, internet, and mobile phone accounts.

Additionally, your credit is a big factor in the rates you’re quoted for auto insurance and home insurance in most states. Depending on where you live, having poor credit means you could pay more than double what someone with excellent credit pays for the same insurance policy.

See also: The Truth About Credit and Insurance Rates

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Myth #9: Every bill you pay helps build credit.

Truth: Not all bills you pay affect your credit scores. For instance, payments to small companies, individuals, and local services—such as for rent, pest control, or a storage unit—typically don’t show up on your credit report.

The credit bureaus have strict requirements about who can report consumer information to them, and in many cases, it’s just not feasible for small businesses. If a merchant doesn’t report payment information to the credit bureaus, then your payment history with that company can’t affect your credit scores.

However, if you don’t pay up and they turn your account over to a collection agency, that’s another story! Collection companies typically report information to the credit bureaus on accounts they acquire.

Myth #10: Checking your credit hurts your score.

Truth: Pulling your own credit report is called a “soft inquiry” and it never hurts your credit scores, no matter how often you request it. “Hard inquiries” are made by lenders or credit card companies when you apply for a new account and they do reduce your scores slightly in the short term.

So, don’t be shy about getting your credit reports. Check out sites like Credit Karma and Credit Sesame that give you unlimited access to one or more of your credit reports and scores for free. Checking your reports regularly is the best way to catch fraudulent activity and stop an identity thief in his tracks.

Free Resource: Learn how to build credit, check your credit reports, and get errors corrected in the free Credit Score Survival Kit, a free multimedia tutorial.   

Myth #11: You have one credit score.

Each scoring model uses a different scale of numbers or letters, which is why your score isn’t as important as whether your rating is trending up, flat, or down.

Truth: While some credit scores are more popular than others, such as FICO and VantageScore, there are hundreds of credit scoring models in use. Plus, companies can use their own algorithms based on what they sell. For instance, insurers typically use a credit-based insurance score.

Each scoring model uses a different scale of numbers or letters, which is why your score isn’t as important as whether your rating is trending up, flat, or down. Even if you hit the top of one score, you may not for others.

Myth #12: Closing a credit account erases its history.

Truth: Closing a credit card or paying off a loan doesn’t make it fall off your credit reports. So, don’t think that you can go unnoticed by simply cancelling an account with late payments.

All information related to a credit account with negative information stays on your credit report for seven years. If an account only has positive data, it remains in your file for 10 years.

See also: Late Payments and Your Credit: Tips to Minimize the Damage

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