There are all sorts of myths that have grown into legends. The Lochness Monster, Paul Bunyan, & UFOs have all developed outsized tales that make for interesting TV shows and are fun to talk about. Part of the reason these myths persist is because there isn’t documented existence to the contrary.

But credit score myths, on the other hand, continue to exist despite hard evidence of their inaccuracies. That’s why we’re so passionate about busting them. Credit score myths impact your finances in a real and ongoing way.

Common Credit Score Myths:

We want you to have a great credit score because it has such a wide-ranging impact on your financial life. Everything from insurance rates to home loans to getting approved for a rental or even landing a job! No-one is completely insulated from the realities of the credit score system.

Ok, let’s bust some of these myths up!…

Myth #1: You need to use credit cards to build credit

While credit cards are the most common topic buzzing around boosting (or hurting) your credit score, they are not the only tools that help build credit. You can establish, build or even repair your credit score without a credit card.

Credit reports are made up of data from companies and organizations sending your usage and history to the 3 major credit bureaus. And there are a number of ways this can be done besides using a credit card. Such as:

• Rent, phone, and utility payments: You can get credit for history paying these services by asking service providers to report to credit bureaus.
• Secured loans and co-signed loans. Payment history is reported for loans like this, even if you have to pre-pay or give collateral for a line of credit.
• Being an authorized user on someone else’s credit card: Just by having your name and SSN associated with a healthy account can build credit history, even if you never touch the card!
• Credit builder loans: These are loan types that are specifically built for building credit.

While we definitely encourage people to use credit cards (always following best practices), if you know for sure that you’ll get into trouble, then stay away from them! There are other solid avenues for building up your credit score.

Myth #2: Your credit score doesn’t really matter all that much

This is one of the most misunderstood credit score myths out there. While your credit score might have diminishing returns after reaching a high number (like anything above 740+), almost everything will cost you more if your credit score is below that threshold.

Lenders will charge you a ‘risk premium’ if your score isn’t great. Even worse – they might decide not to lend to you at all if your score is in the dumps. 

You might say that you never plan to own a home, and that’s fine. But your credit score comes into play when you’re renting a house too. Landlords will almost always run a credit check, and that will impact your ability to get the place you want. A bad score can mean a denial.

A rough or non-existent score could also impact your ability to get home internet or cable service. In many states you’re likely to pay significantly more for auto insurance – sometimes doubling your premiums – if your score is low. It’s not a trivial thing!

Not only will a crappy credit score impact your ability to spend money – which, let’s be honest, maybe this is actually a blessing in disguise 😉–  but it can also hamper your ability to earn money. Your credit history can have an impact when you apply for some jobs, like ones in finance or management, in particular. Credit checks happen more often for these types of jobs where the stakes are higher, like when a security clearance is involved or if you have access to a lot of money or other sensitive information. One study shows that 25% of HR managers will check your credit history during the hiring process even though they won’t be able to see your actual score in most cases!

Bottom line is, your credit score absolutely matters.

Myth #3: Checking your credit score hurts your credit score

Years ago, credit scores were kind of shrouded in secrecy. The bureaus, banks, and lenders knew what our score was, but consumers were never privy to that information. Credit scores felt kind of like Fight Club, where the first rule is to not talk about it, fearing that just asking about it might punish your score to the tune of a 10-20 point drop!

But it is important to know that there is a difference between a soft pull of your credit and a hard inquiry. Hard credit inquiries will ding your score, but soft ones won’t. And the reality is that more and more lenders and agencies are allowing soft inquiries for loan approvals vs. hard ones.

Hard credit enquiries:

If you’re getting a mortgage or a car loan, the lender will run your credit and that’s considered a hard inquiry. That “hard pull” will ding your score just a little bit, maybe 8-15 points. Unfortunately it’s just the price of admission. After all, the credit bureaus don’t want to see you applying for new lines of credit every chance you get.

But on that note, some folks have come to believe that shopping around for a loan will hurt your score. And while it’s true you’ll see an initial hit to your score, that doesn’t mean that if you shop with multiple lenders that it will send your score sinking even lower, every single time you get a quote. The bureaus have set it up to where if you make multiple inquiries inside of a specific time window, typically two weeks, those 3 or 4 credit pulls will count as just a single one. 

Don’t freak out about hard credit inquiries. If your applications are legitimate, it’s always best to get multiple quotes so you can secure the lowest rate and best terms for your borrowing.

Soft credit enquiries: 

On the other end of the spectrum, checking your own score via your bank’s mobile app or through a site like Credit Karma will not have any negative impact. You can check every single day if you want to (although that sounds like overkill).

Some lenders also provide “pre-approval” checks for loan applications. This allows users to “soft apply” for things like credit cards or personal loans without incurring a hard credit query on their record.

All in all, not every credit inquiry is hurtful to your credit score. And anyone who says so doesn’t know the truth about these credit score myths! Know the difference when you are exploring loans and credit cards!

Myth #4: Having debt will hurt your credit score.

This is actually the opposite of true! Your score actually goes up if you have a variety of different loans and credit types (assuming you are handling them all well).

The credit scoring model means that it pays to have a variety of debt types. This proves to the credit bureaus that you’re trustworthy in different areas of life.

For example, using a few credit cards regularly and paying them off each month shows that you are a responsible consumer. Having a mortgage shows you are a responsible homeowner and can handle large, long-term loans. Having an abundance of loan varieties is actually a good thing!

So should you go into more debt just to improve your credit score? No way! Then you’d be letting the tail wag the dog. But healthy debt levels can actually help your score, not hurt it.

Myth #5: Carrying a balance will help boost your credit score

This is the flip side of the coin from the point above. While having a nice mix of debt is helping your score, not paying your debts can really really hurt it.

All of your monthly statement balances get reported to the credit bureaus. And carrying a balance makes them think you don’t have the money to pay, which dings your worthiness and credit score.

Payments just 1 day late or 1 dollar short will hurt you. Not to mention they cost you more in interest! Make sure that you pay your loans on time, every time. 

Myth #6: Savings and checking accounts help your credit score

Nope, bank accounts don’t help you build credit. And this is because banks don’t report activity from checking, savings, or CD deposit accounts to the credit bureaus. You could save up $100,000 in your checking account and your score wouldn’t change.

That being said, if your checking account goes into overdraft, you could be in for some trouble. Banks DO report debts, collections, and money owed to credit agencies. It’s important to keep your checking account in good standing and never have a negative balance.

Myth #7: You should hire someone to help you fix your banged-up credit score

No way, Jose! There’s nothing that someone on the internet claiming to help your score can do that you can’t do for yourself. It’s a waste of money and often it’s just an all-out con.

Oftentimes “credit score fixers” will try to charge an up-front fee, promising miracles. But then they end up not being able to deliver on their promises which include claims to be able to remove negative information from your credit report – even if that info is accurate.

Plain and simple: Avoid anyone who says they’ll fix your score if you just pay them money. It doesn’t work like that. And if they ask for money up-front, it’s actually illegal. Run away from credit score myths like this!

Want to know the correct ways to fix your credit score? We cover that all in this post about rebuilding credit the right way.

Myth #8: A perfect credit score means you’re rich

We already mentioned that good credit scores are important. But they’re really only important up to a certain point. Once you’re considered to have “very good” or “excellent” credit (anything above or around 740), there’s no huge advantage to increasing your score or attempting to reach perfection.

Credit scores measure worthiness, not actual wealth level. You could have a 800 credit score and be living paycheck to paycheck. Or you could have a crappy credit score and be financially independent.

Credit scores do not equal automatic riches. Nor do they determine happiness in life! So while you’re out there building your score, don’t make it your be all end all goal. The truth is that it’s just one of the many tools you can and should wield well on your journey. 

The Factors That Affect Credit Scores

If you want to build good credit, familiarize yourself with the way bureaus calculate your credit score. Here are the different factors, and how impactful they are to your score:

As you can see, payment history and credit utilization are the most important. Lenders want to see you have a healthy amount of available credit, and a perfect track record of meeting your debt obligations.

New inquiries, credit mix, and age of credit are all important too. But no need to be “perfect” in these areas as they have a much smaller influence.

How To Check Your Credit Score for Free

If you have a major credit card with Capital One, Chase, or American Express, chances are you have access to a credit monitoring tool in your lender’s mobile app. Just log into your account and check it out.

Empower (used to be Personal Capital) has a free credit score tool. CreditKarma is another killer free tool for checking your credit score and seeing how you can improve. These apps do “soft” enquiries that don’t affect your score.

Lastly, AnnualCreditReport.com is the only official site authorized by federal law to provide free credit reports. You can currently get your credit report for free once a week from each of the three bureaus via that site. 

Don’t ever go directly to the credit bureau websites to get that information. They’ll charge you an arm and a leg! 

Disputing Errors on Your Credit Report

Monitoring your credit is important to make sure they are no errors, fraud, or silly things that might be dragging down your score. If you notice any errors, follow these steps:

• Gather all documents, screenshots, evidence about the error
• Send a letter to the major credit bureaus explaining the error. Here’s how to do it with Experian, Equifax and TransUnion.
• Stay on top of it! I know it’s a manual process, but you need to stay persistent until the error is fixed. Your score and financial health could be on the line!
• Consider freezing your credit to prevent fraud which can be a nightmare to resolve while also negatively impacting your score.

The Bottom Line:

Credit score myths are a real danger to consumers because following the wrong advice can have serious and long-lasting financial consequences. Make sure you’ve got the proper (and proven) information to establish, build, and repair your credit score.

If you’ve got kids, it’s a good idea to start thinking about their credit too. Passing this type of knowledge onto your kids is a great way to give them a financial head start in life. And adding them as authorized users on your credit cards (if you handle them wisely) is a great way to begin establishing a healthy credit history for them early!

Related posts:

• Best credit cards for unemployed folks
• Good debt vs. Bad debt, explained
• When is it OK to cancel a credit card?

Additional links:

While discussing credit score myths we enjoyed a Hello World by Spyglass Brewing. Big thanks to Gary over at The Fat and Broke podcast for donating this one! And please help us to spread the word by letting friends know about How to Money! Hit the share button, subscribe, and give us a quick review in Apple Podcasts. Help us to change the conversation around personal finance and get more people doing smart things with their money!

Best friends out!