We’ve all inherited wisdom from our friends, parents, and even grandparents about how to build a good credit score. Have you ever actually researched any of those claims? The truth is, many Americans are planning their credit using myths that could actually be damaging credit scores.
Take a look at the top four credit score myths, and stay away from these common mistakes.
1. A Large Balance Won’t Hurt As Long As You Pay On Time
While payment history holds the most weight of all credit scoring models, carrying a high balance on your credit card from month to month can actually have a negative effect on your score. It’s best to keep credit card balances below 30% of their available limit. The best method is to pay your balance off completely at the end of every month.
2. You Need to Carry a Balance
A surprising number of people believe that you need to have a balance on your credit card in order to build credit. This isn’t true. While credit card debt seems normal to many, you don’t need to carry a balance for it to be beneficial. Instead, you should focus your attention on using the card when needed and keeping the balance as low as possible.
3. Closing Out Old Accounts Is Helpful
Unless closing out an old account is going to greatly benefit the way you manage credit card debt, it probably isn’t worth doing. Closing out one account often forces you to spend more on other cards, maintaining higher balances. It’s also important to remember that after you close an account, that information remains on your credit report for around seven years.
4. Multiple Credit Accounts Affects You Negatively
Although limiting yourself to one credit account will certainly make managing finances simpler, it won’t benefit your credit score. In fact, most scoring models reward you for having more than one type of credit account. The reason for this is that different types of credit tell a lender different things about your payment habits. For example, an installment loan, like an auto loan or mortgage, requires you to pay a fixed number over a period of time. On the other hand, credit cards put you in charge of how much you spend and how much you pay back. Having both types of credit gives the lender a well-rounded idea of who they’re lending to.