7 Credit Myths (and the Truth About Your Credit Score)

For many Americans, there’s a shroud of mystery surrounding a particular area of their finances — their credit. 

How does it really work? What information can lenders see? And what enigmatic forces are causing your credit score to go up, down, or even way down?  

Over time, a number of believable credit myths have popped up over and over again. So, what’s true? And what do you think you know that’s not truly accurate? 

We’re shedding a light on seven common misconceptions around credit and sharing the facts about how your credit and finances really work. 

MYTH #1: All debt is bad. 

It’s generally not a good idea to go into debt for purchases you don’t really need. And, if you do have debt, you want it to be debt that you consciously choose to take on — not debt that you’re trapped in. 

But there is such a thing as good debt! These purchases are worth the fees and interest you pay since they usually offer a great return on your investment. Consider, for instance, a home mortgage. You might voluntarily borrow for 30 years, but you get a home for your family and real estate that likely appreciates in value. 

Or what about a student loan? If you choose wisely, you’ll receive an education that gives you future earning power — and the ability to repay that loan in full. As you manage your debt responsibly over time, you’ll build a solid credit history. And your improved credit score can open a lot of doors for you. 

MYTH #2: You have only one credit score. 

Let’s talk about what a credit score is — a number that represents how much risk you represent to a lender. The higher your score, the lower the perceived risk. And the way a score is calculated is by entering key details about you into a formula. 

But there’s not just one formula out there. Different strategies exist for choosing factors to consider and assigning each of those a weight. 

The two scores you’ll see most often are your FICO Score and VantageScore. Generally, lenders will look at one or the other in determining your creditworthiness. And, while it’s true that a high FICO Score usually translates to a high VantageScore, you’ll likely see different numbers when comparing the two. 

So, if you’re tracking your score over time, make sure you stick with just one metric. You’ll want to compare apples to apples as you work to improve your credit. 

MYTH #3: Your credit score depends on your income, education, or gender. 

Now, while different credit scoring models may use different factors, there are clear restrictions on what information can’t be considered. The Equal Credit Opportunity Act prohibits the use of race, color, national origin, sex, marital status, age, religion, and the need for public assistance in determining your creditworthiness. 

Furthermore, your credit scores don’t include things like the amount of money you make, the level of education you’ve achieved, where you live, what job you have, or how long you’ve been employed. 

MYTH #4: Checking your credit hurts your score. 

Want to check out your free credit history report? That will never affect your score. And when you look up your own credit score, you initiate what’s called a soft credit check. A soft check (or soft inquiry) doesn’t impact your credit score at all. 

You might also experience a soft check if a creditor runs your score to see if they can market certain financial products to you. Additionally, you’ll kick off a soft check if you want to get prequalified for a loan. Instead of running a full application with a hard credit check, you get information about your financing options without affecting your credit score. 

A hard credit check (or hard inquiry) can affect your credit score. This type of inquiry requires your permission and usually happens when you actively apply for new credit — like a mortgage, student loan, credit card, or personal loan. 

Typically, the impact of a hard inquiry is just a few points, though you may see a more significant dip if you apply for several lines of credit in a short timeframe. And, while hard inquiries stay on your credit report for two years, the already-small impact diminishes as time passes.  

MYTH #5: Carrying a balance boosts your score. 

A full 22% of adults mistakenly believe this enduring myth. But the opposite is actually true. Everyone with credit has something called a credit utilization ratio. That number is simply the percent of your available revolving credit that you’re actually using. 

So, let’s say you have a credit limit of $10,000 across all your credit cards, combined. If your outstanding balances on those cards are $3500 total, your credit utilization ratio is $3500 / $10,000, which is 35%. 

Your credit utilization ratio has a lot of weight in your credit score. In general, a lower credit utilization ratio means a higher credit score, and a higher ratio translates to a lower score. 

As a rule of thumb, aim to keep your credit utilization under 30%. Once you go above that number, you could see a drop in your credit score. 

MYTH #6: You can’t get a loan with bad credit. 

It’s true that you may not qualify for some loans if your FICO score falls below 670. But you may be able to secure what is often referred to as a bad credit loan. 

These loans are created specifically for people with fair credit (580 – 669) to poor credit (300 – 579). They’re usually offered as unsecured personal loans with fixed interest rates and fixed monthly payments. So, you know upfront exactly how much you’ll pay each month to borrow money. 

Many reputable lenders offer a prequalification process, so you can see which bad credit loans you’re eligible to receive — all without running a hard credit check. And, once approved, you might get the funds you need in as little as 24 hours. 

MYTH #7: Bad credit is forever. 

Damaging your credit is, unfortunately, pretty easy to do. Even just a few late payments can cause a significant drop in your score. And bigger financial missteps could put your score well below average. 

Fortunately, as time goes by, those mistakes have less and less impact on your score. And, eventually, even the big things — like debts in collection, foreclosures, and bankruptcies — fall of your credit report entirely. Additionally, anyone can improve their credit score over time with a few simple habits: 

1. Pay each of your bills on time. Late payments are the #1 way to hurt your score, but staying on top of your bills is the best way to improve your credit history. 

2. Watch that credit utilization ratio. Whenever possible, try to use less than 30% of your available credit limits. 

3. Limit applications for new credit. Hard credit checks and brand-new loans or cards can eat away at your credit score. 

4. Keep your old cards open. Even if you pay off a credit card, consider keeping it open. The history of that card as it ages will actually boost your score. 

5. Borrow from lenders who report to credit bureaus. If you do take on a bad credit loan, use a lender who reports your good payment history to the organizations that track your credit use, which determines your score. 

Credit myths are all too common in our society. But knowing the truth about credit and debt is a game-changer. With the facts on your side, you have the knowledge you need to understand your own credit better and plot a path to greater financial health.