There’s a lot of misinformation floating around the internet about credit scores. That’s unfortunate because knowing how to maximize your credit score is one of the most important aspects of personal finance. A good credit score can help you qualify for an apartment, get a lower interest rate on a loan, avoid paying a deposit to a utility company and so much more.
In this article, we’ll sort through the most common credit score myths and misconceptions to help you better understand how to manage your score.
Myth #1: Checking your credit hurts your credit score
There’s a popular myth that says checking your credit score will actually hurt it. As a consumer, you can view your credit score or credit report without negatively impacting your credit, and you should do so regularly to know where you stand and what you can do to improve. It doesn’t matter how often you view your score or where you view it— checking will never hurt your credit.
However, if a third party checks your credit, that could hurt your score. There are two ways that a credit card company or lender can check your credit: a soft inquiry and a hard inquiry.
A soft inquiry occurs when you are preapproved for a loan or credit card, but it will usually not include the final interest rate you qualify for. A soft inquiry will not appear on your credit report and will therefore not affect your credit score. However, a hard inquiry will appear on your report and could ding your score for a year. If you officially apply for a credit card or loan, it will count as a hard inquiry. That’s why you shouldn’t apply with a lender unless you truly need to.
Myth #2: You need to pay to check your credit
Sites like myFICO.com offer memberships where you can check your official credit score in exchange for paying a monthly fee. But the average college student doesn’t need to pay to view their score.
Many banks and credit card issuers offer free credit scores to both customers and non-customers, so there’s almost no need to pay for your credit score. These include Chase, Capital One and American Express. Sites like Credit Karma, Nerdwallet and Mint will also show your credit score if you sign up.
If you create an account at one of those free sites, you may also get notifications when your score changes. This can help you keep track of any potential issues, like someone stealing your information and creating an account in your name.
Myth #3: Your income and assets affect your credit score
Your credit score is only a reflection of your activity as a borrower. How much you earn or how much money you save does not impact your credit score.
For example, someone with a six-figure salary with a history of late payments could have a much lower credit score than someone with a minimum wage job and a stellar on-time payment history. You could have thousands of dollars in savings and still have a poor credit score. Lenders may still use your income to determine how much they will lend you, but your income won’t affect your credit score.
While your salary or total savings won’t affect your credit report, how you rely on credit can. Credit utilization — or how much money is currently charged to your credit card compared to the credit limit — is the second most important factor in your credit score.
If you have a low income and are therefore relying on credit cards to keep you afloat, you may have a high credit utilization percentage, which can drag down your credit score. An ideal credit utilization percentage is 10% or less. For example, if you have a $500 total credit limit, then you should ideally have a $50 balance or less. Keep your credit card spending in check, or call your credit card company to see if they’ll raise your limit, to help lower this number.
Myth #4: Having a credit card balance improves my credit score
Another dangerous — and costly — myth is the idea that you need to keep a balance on your credit card in order to improve your credit score. Keeping a balance on your credit card will only result in you paying interest charges on the amount and will not increase your score.
Here’s what actually helps build your credit. Open a credit card and use it for one or two small purchases. Then, wait for the statement period to end and for the monthly bill to be issued. (If you pay off the balance before the statement period is over, then the credit card will not report any card activity to the credit card bureaus, so it won’t help build your score.) Set up automatic payments to make the full payment on or before the due date.
Students who have no credit or bad credit don’t have to worry. Credit scores can be changed at any time, unlike your final GPA. Make your payments on time, keep your credit utilization low and keep an eye on your score to look for opportunities to fix problems. It may take some time, but small changes can make huge improvements to your score.