Even though the curtain was pulled back on FICO in 2000, allowing us to see how our credit scores are created, there are still lots of myths out there about how we should use credit and things that supposedly help or hurt us in getting the best score that we can. A lot of these myths, unfortunately, contain nuggets of truth, which is why they are so hard to spot. But that’s what we’re here for – read on for 4 of the biggest credit myths and how they can actually damage your score.
Lower limits help your credit score.
Unless you are the type of person who just can’t help themselves in using whatever credit they have up to the limit, this is absolutely false. In fact, when lenders look at your credit, they want to see that you have a large amount of potential money available, but that you’re spending relatively little of it. People who lower their limit, thinking that this shows lenders that they can’t go into really bad debt are actually hurting themselves because the gap between what you’re spending and what you could potentially spend gets smaller. Your goal should be to have the highest limit that the credit card company will give you… and then not use it. But wait a minute, you’re saying, you thought that…
You have to use credit to build credit.
This is one that gets bandied about quite a bit, but it’s not true. Lenders certainly want to see that you have credit so that you have the potential to spend, but it’s actually far better for you the less money you put on your credit cards. In fact, if you are spending more than 30 percent of your income on credit card purchases – even if you’re paying it off every month – it can actually lower your credit score. The best scenario is to have a very high credit limit, but not actually use the card at all. This way, the “gap” described above will always be wide.
[Free Resource: Check your free credit report and score]
Checking your credit rating will actually lower it.
A lot of people get confused on this one because it is true that a number of “hard” inquiries into your credit history (e.g. those made by companies like banks when they are looking into whether or not to give you a loan) can lower your credit score. However, when it’s just you checking on your own score, this is considered a “soft” inquiry and doesn’t affect anything. In fact, not checking can be far more dangerous, because you might discover an outstanding balance that you didn’t know about or uncover a mistake on the report that has been hurting you. Learning this information can help you to correct it, but if you never check the report, you’ll never know.
You earn credit by carrying a balance over from one month to the next.
I have no idea how this particular rumor got out there, but it is the exact opposite of what you want to be doing to get good credit. Carrying balances and having to pay interest not only is bad for your credit score, because it’s the first step to running up bad debt. It’s just bad financial planning in general. Think about it – you’re spending extra money for something that you already have! Other than very specific kinds of things – like student loans or home loans, where tax breaks have been created to help people – your goal on any kind of loan (which a credit card is, at its core) should be to pay it off as quickly as possible and never leave a balance.
What steps do you take to ensure that your credit score stays high? Please share in the comments.