Understanding credit is essential for financial health, yet many misconceptions persist about how credit scores work and what influences them. These myths can hinder your ability to improve your credit score and achieve better financial opportunities. Here are seven common myths about bad credit that may be holding you back.
1. Checking Your Credit Score Hurts It
One of the most prevalent myths is that checking your own credit score negatively impacts it. This is false. When you check your own score, it is considered a “soft inquiry,” which does not affect your credit score at all (Equifax, 2023). In fact, regularly monitoring your credit can help you stay informed about your financial health and identify any discrepancies that may need addressing. According to the Consumer Financial Protection Bureau (CFPB), being proactive about checking your credit can lead to improved financial decisions (CFPB, 2022).
2. Carrying a Balance Improves Your Score
Another common misconception is that carrying a balance on your credit cards will improve your credit score. This is not true. Your credit utilization ratio, which is the amount of credit you are using compared to your total available credit, plays a significant role in determining your score. Ideally, you should keep this ratio below 30% (FICO, 2023). Carrying a balance not only incurs interest charges but can also signal to lenders that you are over-reliant on credit, which can negatively impact your score.
3. Closing Old Accounts Boosts Your Score
Many people believe that closing old or unused credit accounts will help improve their credit score by eliminating potential risks associated with those accounts. However, closing an account can actually hurt your score. When you close an account, you reduce your total available credit, which can increase your credit utilization ratio (TransUnion, 2023). Additionally, older accounts contribute positively to the length of your credit history—another factor in calculating your score. Therefore, it’s generally advisable to keep old accounts open, especially if they have no annual fees.
4. All Debt Is Bad Debt
While it’s true that excessive debt can harm your credit score, not all debt is created equal. Good debt—such as a mortgage or student loans—can actually help improve your credit profile if managed responsibly. Lenders often view good debt as an investment in your future (Wisr, 2024). Conversely, high-interest debt from payday loans or maxed-out credit cards can negatively impact your score. Understanding the difference between good and bad debt is crucial for maintaining a healthy credit profile.
5. You Need a High Income to Have Good Credit
Another myth is that only individuals with high incomes can achieve good credit scores. In reality, income does not directly affect your credit score; rather, it’s how you manage existing debts and payments that counts (Heritage Bank, 2023). Individuals with lower incomes can still maintain excellent credit by paying bills on time and keeping their debt levels manageable.
6. Divorce Automatically Affects Your Credit Score
Many believe that divorce automatically separates their credit scores from their spouse’s; however, this is not the case. Joint accounts remain linked to both parties even after divorce unless they are explicitly separated by contacting creditors (TransUnion, 2023). If one spouse fails to make payments on joint accounts, it can negatively affect the other spouse’s credit score as well. It’s essential for individuals going through a divorce to review their joint accounts and take steps to protect their individual credit profiles.
7. Bad Credit Means You’ll Never Get Approved for Credit
Finally, many people think that having bad credit means they will never be able to secure loans or new lines of credit again. While it’s true that poor credit can limit options and result in higher interest rates, it does not completely bar individuals from obtaining credit (Equifax, 2023). Many lenders specialize in offering loans to individuals with less-than-perfect scores; however, the terms may not be as favorable as those offered to borrowers with good scores.
Conclusion
Dispelling these common myths about bad credit is crucial for anyone looking to improve their financial situation. By understanding the realities of how credit works and what factors influence scores, individuals can take proactive steps toward better financial health. Regularly checking your score, managing debt responsibly, and keeping old accounts open are just a few strategies that can lead to improved credit over time.
References
Consumer Financial Protection Bureau. (2022). The impact of timely payments on consumer credit scores. Retrieved from https://www.consumerfinance.gov
Equifax. (2023). Credit myths and facts you should know. Retrieved from https://www.equifax.com/personal/education/credit/score/articles/-/learn/credit-myths-facts/
FICO. (2023). What goes into a FICO Score? Retrieved from https://www.myfico.com
Heritage Bank. (2023). Debunking common credit score myths. Retrieved from https://www.heritagebank.org/post/debunking-common-credit-score-myths
TransUnion Canada. (2023). 7 Top Credit Myths. Retrieved from https://www.transunion.ca/credit-myths
Wisr. (2024). 10 common credit score myths debunked. Retrieved from https://wisr.com.au/blog/10-common-credit-score-myths-debunked