For many people, credit scores are something they know they have, but they don’t necessarily understand how they work. Knowing the truth behind the following five myths can empower you and help you build a healthy credit score.
Myth #1: Requesting a copy of my credit report will hurt my credit score.
Requesting a copy of your personal credit report will not hurt your score. In fact, you have always been entitled to receive a free copy of your credit report once per year from each of the three credit reporting agencies (Experian, Trans Union, and Equifax). You can request your reports in three different ways: online at www.annualcreditreport.com, by phone at 1-877-322-8228, or by mail at Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Be aware that there are imposter websites, so make sure you are only requesting your credit reports through www.annualcreditreport.com.
Myth #2: It is a good idea to cancel any credit cards I am not currently using.
Closing a credit card will decrease the total amount of credit you have available, in turn affecting your “credit utilization ratio.” Your credit utilization ratio is the percentage of available credit that has been borrowed and it makes up 30% of your credit score. Try to alternate the credit cards you use in order to avoid having an account closed by the issuer due to inactivity.
Another reason to avoid canceling your credit cards is that your credit history makes up 15% of your credit score and the longer the credit history, the better. When you cancel a credit card, you reduce the average age, or history, of your accounts. However, it may be wiser in the long run to cancel a card if it has an annual fee and you are not utilizing it.
Myth #3: Shopping around for the best rate for a home mortgage will hurt my credit score.
It’s important to be a smart consumer and shop around to find the best interest rate when taking out a large loan. Typically, when a lender requests to review your credit report as part of the loan application process, it’s recorded on your credit report as a “hard” inquiry and will usually impact your score. This is different from “soft” inquiries that don’t impact your score, like when you check your credit score or when a promotional credit card offer is generated. However, hard inquiries for home, auto, or student loans that occur within a 30 day period will usually count as a signal inquiry and typically won’t affect your score.
Myth #4: My spouse and I have a joint credit score.
Your credit reports are linked to your personal information, so although changing your name updates that detail on your report, nothing else will change. Your own unique credit score remains yours alone. However, if you open a joint account with your spouse or add them onto one of your accounts as an authorized user, the history of that account will be shared on both of your credit reports. It is also possible for one spouse’s credit to affect the couple’s ability to borrow. For example, credit reports and scores for both people are considered when couples apply for a joint account or loan. If one person has a poor credit history, the couple may have to pay higher interest rates or may even be denied the loan.
Myth #5: You should always carry a balance on your credit card. It helps your score!
Since payment history plays the largest role in affecting your credit score (35%), using a credit card wisely can improve your credit score simply by making payments on time each month. But there is no advantage to maintaining a balance on your card. Keeping a balance will cause you to pay interest and having too much debt can hurt your score by affecting your credit utilization ratio. If you can’t afford to pay your card balance in full each month, try to keep your credit utilization rate under 30% across all accounts. Additionally, maxing out your credit cards can send you into a cycle of debt that can be hard to overcome.
Knowledge is power. Be informed and thrive. Royal Credit Union is always here to help!
