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When I first started writing about credit scores in the late 1990s, they were still pretty mysterious. The company that provided the leading credit score, the FICO, refused to reveal much about how the formula worked.
That’s gradually changed over the years, as the company (formerly Fair Isaac, now also known as FICO) bowed to pressure from consumer advocates, lenders and regulators to be more forthcoming.
What hasn’t changed, frustratingly, are the myths about credit scoring. Even though we know so much more about how they work, the same tired misinformation keeps circulating — and keeps hurting people’s ability to improve their scores.
In fact, the chapter in my book “Your Credit Score” that deals with credit myths is the only part of the book that hasn’t required extensive rewrites over the years. For the fourth edition of the book, which came out a few months ago, I left that chapter essentially untouched.
Biggest Credit Score Myths
Here are some of the myths that can really cost you if you fall for them:
Credit Score Myth #1: Closing accounts will help your scores.
Fact: Shuttering accounts can’t help your scores, and may hurt them. The FICO formula is sensitive to the gap between your available credit and the amount you’re using. Closing accounts reduces that gap and can wallop your scores.
If you’re trying to boost your scores or in the market for a major loan, resist the urge to “clean up” your credit files. Wait to close accounts until your scores are very high (750 or above) and you’re not planning to apply for any new loans.
Credit Score Myth #2: You can hurt your scores by checking your own credit.
Fact: When you check your own credit reports and credit scores, the inquiry is coded as “soft” rather than “hard.” A soft inquiry doesn’t affect your scores at all. Actually applying for credit is what can ding your scores.
You need to check your credit reports at least once a year (use www.annualcreditreport.com for a free annual copy) to make sure the information on your files is accurate and that you haven’t become the victim of identity theft. You also should check your files and scores a few months before you apply for any loans, so you have time to fix any problems. Don’t let this myth keep you from staying on top of your credit.
Credit Score Myth #3: Your credit scores will take care of themselves if you manage your money properly.
Fact: If you don’t have and actively use credit accounts, eventually you won’t have scores — there won’t be enough relevant data in your credit reports to generate the relevant numbers. Using cash, debit cards or prepaid cards won’t do a thing to help your credit scores.
As long as you have at least one credit account actively reporting to the credit bureaus, you should be able to maintain and improve your scores. That account can be an installment loan, such as a mortgage, auto or student loan, or a revolving account, such as a credit card. Having both types of accounts will help you improve your scores faster.
Credit Score Myth #4: You have to be in debt to have credit scores.
Fact: You don’t need to carry a balance on your credit cards and pay interest to have good scores. Your credit reports — and the credit scores derived from those reports — make no distinction between balances you carry month-to-month and balances you pay off.
Smart consumers don’t carry credit card balances for any reason, and certainly not to improve their scores.