Credit reports and scores are less mysterious than many believe, but stubborn myths about debt and credit can sometimes cause confusion. Here's the truth behind some prominent credit myths.
1. Myth: Debt Is Inherently Bad
Nearly everyone has heard of family members or acquaintances who've gotten in over their heads with debt and had to resort to family loans or even bankruptcy to get out from under them. Some who hear these stories conclude that debt is a danger to be avoided, but that oversimplifies the problem.
Fact: Responsible Borrowing Can Improve Your Financial Situation
Responsible borrowing can allow you to acquire things you couldn't otherwise afford, like a house, a college education or a car—which in turn enable you to live a better life and can even gain value over time.
Sensible management of loan and credit card repayments demonstrates fiscal wisdom, builds positive credit history and elevates credit scores over time. Improved credit in turn provides access to greater borrowing power and lower interest rates.
2. Myth: Checking Your Credit Score Could Lower It
This false notion is likely based on the fact that your credit score can drop a few points when a lender checks it in connection with a credit application, which causes a hard inquiry to appear on your credit report.
Fact: Checking Your Own Credit Has No Impact On Your Score
Checking your own credit score has no impact on your credit scores. Not only does checking your own credit score never hurt, regularly checking your credit can be helpful when you're trying to improve your credit scores.
3. Myth: Higher Income Means Higher Credit Scores
It may seem logical that increasing your income would lead to a higher credit score, but there's no direct connection between the two.
Fact: Income Plays No Role in Credit Scoring
Credit scores are calculated using statistical analysis on the history of borrowing money and repaying debts, as recorded in your credit reports. Your income does not appear on your credit reports, so it cannot factor into credit scores.
The key to credit score improvement is responsible debt management: making consistent on-time payments, avoiding high credit card balances, showing you can handle multiple credit accounts and the like. People with modest incomes who manage their debts wisely can have excellent credit scores, just as people with high incomes who mismanage their debts can have low scores.
That said, many lenders consider your income when deciding if or how much they're willing to lend to you. That's why they may ask for proof of income in addition to checking your credit report.
4. Myth: Marriage Merges Your Credit With Your Spouse's
The basis for this myth may rest on the fact that spouses' debt obligations can become entwined after marriage if, for instance, you and your spouse apply jointly for a mortgage or other credit. Additionally, if you live in a community property state, you and your spouse share responsibility for debts either of you take on during your marriage. But when you get married, you do not take on your spouse's previous debts.
Fact: Getting Married Has No Impact on Your Credit Reports or Scores
There is no such thing as a couple's credit report. Credit reports do not record marital status, so marriage cannot affect the credit scores derived from them. If you seek a loan or other credit jointly with your spouse, the lender will consider both of your credit scores in its approval process. And if you receive a joint loan, it will appear as an account on both your credit report and your spouse's, but your credit reports will remain separate.
Learn more >> What Happens to Your Credit When You Get Married?
5. Myth: Carrying a Credit Card Balance Builds Credit Scores
The basis for this misunderstanding may lie in the fact that paying off an installment loan (such as a car or personal loan) may cause a small drop in credit score. One reason for that impact is that paying off an account can lessen your credit mix—or variety in the number and types of open debt accounts listed on your credit reports. Credit mix is responsible for about 10% of your FICO® Score☉ . The lack of new on-time payments associated with the paid-off account can have an effect too. But the same isn't true for credit card balances.
Fact: Outstanding Balances Don't Aid Credit Scores (and May Hurt Them)
Carrying a credit card balance across billing periods does not benefit your credit scores, and it can even hurt your scores. That's especially true if the balance exceeds about 30% of the card's borrowing limit. Perhaps even worse, carrying forward an outstanding balance typically brings interest charges that can build as the balance remains unpaid.
Paying off credit card balances in full each month shows responsible account management, typically prevents interest charges and won't affect your credit mix, since a card account remains open when its balance is $0 (unlike an installment loan, which is closed when it's fully repaid). Just be sure you make purchases with the card occasionally and pay them off: Credit card issuers may close an account if it's inactive for too long, typically about a year.
6. Myth: Closing Credit Cards Will Help Your Credit Score
If a credit card poses an irresistible temptation to overspend, it may be best for your credit in the long run to close it. But in the near term, closing a credit card can actually hurt your credit scores.
Fact: By Reducing Available Credit, Closing Cards Can Hurt Credit Scores
Credit scores are highly sensitive to credit utilization, the percentage of your available revolving credit limit represented by all your outstanding balances. Utilization is responsible for about 30% of your FICO® Score, and a utilization rate that exceeds about 30%—on a single card, or on all accounts combined—can cause a greater negative effect on your credit scores.
If you close a credit card account while you have outstanding balances on other cards, your overall utilization rate will increase and could hurt your credit scores. (Silver lining: Credit scores tend to respond quickly when you pay down your outstanding card balances.)
Learn more >> How Important Is Credit Card Utilization to Your Credit Score?
7. Myth: You Have a Single Credit Score
You can check your credit score in a variety of ways—through credit reporting agencies, your bank or financial institution, your credit card issuer and more. If you check your score in more than one place, you may be surprised to find that the scores are not the same. But, in fact, you likely have many credit scores.
Fact: Many Different Credit Scores and Scoring Systems Exist
While most lenders use credit scores in their decision-making processes, which score (or scores) they use is up to them—and they have many options to choose from. Multiple versions of the leading commercial systems, the FICO® Score and VantageScore® credit scores, are available for use by lenders. Additionally, specialized versions of the FICO® Score are offered for use by credit card issuers and auto lenders, and older versions of both FICO® Score and VantageScore credit scores may still be in use by some lenders. Finally, depending on where you check your own score, you could get slightly different results.
All credit scoring tools look for patterns in credit usage, but each differs somewhat in the way it evaluates information in your credit reports. So you can have multiple numerical scores that are all considered legitimate.
Learn more >> Why Are My Credit Scores Different?
8. Myth: Credit Scores Incorporate Demographic Information
Concern over potential disparities in access to credit among various groups may leave some consumers wondering about the use of demographic data in calculating credit scores.
Fact: Credit Scores Cannot Consider Demographic Factors
As discussed above, credit report data upon which credit scores are based don't include income or marital status. They also do not reflect your race, ethnicity, religion, sexual orientation or other demographic information—all of which lenders are forbidden from considering in lending decisions under the federal Equal Credit Opportunity Act (ECOA). Since that information is not included in your credit reports, it cannot influence your credit scores.
9. Myth: Bad Choices Can Mean You'll Never Qualify for Credit
Credit crises such as loan or credit card default, foreclosure and bankruptcy can be emotionally devastating, and they can feel like a stigma you'll never shake—but that's not the case.
Fact: Negative Credit Report Information Expires Over Time
Negative events in your credit history are not permanent marks on your credit report. Most negative credit report entries expire after seven years, including missed payments, foreclosures, repossessions and Chapter 13 bankruptcy. Chapter 7 bankruptcy stays on your credit report for 10 years, but then it expires. And while these entries may hurt your credit scores as long as they remain on your credit reports, their negative effect will lessen over time.
Learn more >> How Long Can Negative Items Stay on Your Credit Report?
10. Myth: "Credit Repair" Firms Can Purge a Bad Credit History
If your credit history reflects missteps such as missed payments, foreclosure or bankruptcy, or if you're swamped with debt and hoping to avoid those outcomes, beware of for-profit companies that promise to clean up bad credit or reduce your debts by negotiating with lenders to lower the amounts you owe.
Fact: Accurate Credit Data Can't Be Erased
You can rebuild poor credit over time, but there are no shortcuts or quick fixes to doing so. Costly for-profit "credit repair" companies can leave you with greater debt than you started out with and cannot do anything for you that you can't do yourself. No one can remove accurate information from your credit report, and if there are inaccurate negative entries in your report, you have the right to dispute them for free to update the record.
Certified nonprofit credit counselors can help you come up with a plan to manage and repay debts, but ultimately good credit management is the key to credit score improvement.
11. Myth: Credit Scores Reflect on Your Personal Reputation
It's natural to feel disappointed if a credit score is lower than you'd like it to be, especially if a credit application is denied on the basis of your score. But rather than taking it personally, it's wise to view it as a chance to see how you might improve your scores and thus potentially your financial situation.
Fact: Credit Scores Are Not Personal Judgments
Credit scores are designed to predict your likelihood of repaying debt. A low score doesn't mean anyone has judged you to be a bad person. A low score could be caused by a history of spotty payments (or more severe negative events), but your score could also be relatively low if you're new to the world of credit and haven't yet proven you can manage debt responsibly. In either case, you can build a positive credit record by paying bills on time, keeping credit balances low and seeking new credit only when you need it.
If you're disqualified for credit on the basis of a credit score (or even if a credit offer is made at an interest rate greater than the lowest one available from the lender), federal law requires the lender to provide an explanation in writing. Studying that notice can help you understand what's hurting your credit scores, so you can better focus your efforts at score improvement.
The Bottom Line
Many of these credit myths have persisted for years, despite the industry's efforts to set the record straight, so don't feel bad if you've been misled by them. Now that you've sorted fact from fiction, you can gain even greater clarity by regularly checking your credit reports at AnnualCreditReport.com, and by monitoring your credit scores. You can get your free FICO® Score from Experian.