Debunking Common Myths About Credit

Credit is one of the most misunderstood aspects of personal finance. Despite its importance in modern financial systems, myths and misconceptions about credit persist, often leading people to make poor financial decisions. In today’s world, where credit scores influence everything from loan approvals to job opportunities, it’s crucial to separate fact from fiction. Let’s debunk some of the most common credit myths and set the record straight.

Myth 1: Checking Your Credit Score Lowers It

One of the most pervasive myths is that checking your credit score will hurt it. Many people avoid monitoring their credit out of fear that it will negatively impact their score.

The Truth: Soft Inquiries vs. Hard Inquiries

There are two types of credit inquiries:
- Soft inquiries occur when you check your own credit or when a lender pre-approves you for an offer. These do not affect your score.
- Hard inquiries happen when a lender checks your credit for a loan or credit card application. These can slightly lower your score, but the impact is minimal and temporary.

Regularly monitoring your credit is essential for spotting errors or fraud, so don’t hesitate to check your score.

Myth 2: Carrying a Small Balance Helps Your Credit Score

Some believe that carrying a small balance on their credit card each month boosts their credit score. This myth likely stems from confusion about how credit utilization works.

The Truth: Paying in Full Is Best

Credit utilization—the percentage of your available credit you’re using—is a key factor in your score. However, you don’t need to carry a balance to benefit. In fact, paying your balance in full each month:
- Avoids interest charges
- Keeps your utilization low
- Demonstrates responsible credit use

Carrying a balance only costs you money in interest without providing any credit score benefits.

Myth 3: Closing Old Credit Cards Improves Your Score

Many people think closing old or unused credit cards will help their credit score by simplifying their credit profile.

The Truth: Closing Cards Can Hurt Your Score

Closing an old credit card can negatively impact your score in two ways:
1. Reduces your total available credit, which may increase your credit utilization ratio.
2. Shortens your credit history, especially if the card was one of your oldest accounts.

Instead of closing old cards, consider keeping them open and using them occasionally to maintain activity.

Myth 4: You Only Have One Credit Score

Some assume there’s a single, universal credit score that all lenders use.

The Truth: Multiple Scoring Models Exist

There are several credit scoring models, including:
- FICO Score (most widely used)
- VantageScore (an alternative model)
- Industry-specific scores (e.g., auto lenders may use a specialized FICO Auto Score)

Additionally, the three major credit bureaus (Equifax, Experian, and TransUnion) may report slightly different data, leading to variations in your scores.

Myth 5: You Need to Carry Debt to Build Credit

A dangerous misconception is that you must take on debt—like loans or credit card balances—to build a good credit history.

The Truth: Responsible Credit Use Is What Matters

You don’t need to go into debt to build credit. Simply:
- Using a credit card for small purchases and paying it off monthly
- Making on-time payments for utilities or rent (if reported)
- Keeping accounts in good standing

These habits demonstrate creditworthiness without unnecessary debt.

Myth 6: Income Affects Your Credit Score

Many people mistakenly believe their income level is factored into their credit score.

The Truth: Income Isn’t a Scoring Factor

Your credit score is based on:
- Payment history
- Credit utilization
- Length of credit history
- Credit mix
- New credit inquiries

While lenders may consider income when approving loans, it doesn’t directly influence your credit score.

Myth 7: All Debt Is Bad for Your Credit

Some avoid all forms of debt, thinking it will harm their credit.

The Truth: Not All Debt Is Equal

• Revolving debt (e.g., credit cards) can hurt your score if utilization is high.
• Installment debt (e.g., mortgages, student loans) can help if managed responsibly.

A mix of credit types can actually improve your score by showing you can handle different forms of credit.

Myth 8: Paying Off a Negative Item Removes It from Your Report

After settling a late payment or collection account, some expect it to disappear from their credit report.

The Truth: Negative Items Can Stay for Years

Most negative information, like late payments or collections, can remain on your report for 7 years (10 years for bankruptcies). Paying off the debt updates the status but doesn’t erase the history.

However, newer scoring models may weigh paid collections less heavily than unpaid ones.

Myth 9: Credit Repair Companies Can Fix Your Score Instantly

Ads promising "quick credit fixes" prey on people desperate to improve their scores.

The Truth: Legitimate Credit Repair Takes Time

While credit repair companies can help dispute errors, they can’t:
- Remove accurate negative information
- Guarantee score improvements
- Do anything you can’t do yourself for free

Building good credit requires consistent, responsible behavior over time.

Myth 10: Debit Cards Help Build Credit

Since debit cards deduct funds directly from your bank account, some assume they contribute to credit history.

The Truth: Debit Cards Don’t Affect Credit

Only credit products (credit cards, loans, etc.) are reported to credit bureaus. If you want to build credit, you’ll need to use credit responsibly.

Myth 11: A High Salary Means a High Credit Score

Wealth doesn’t automatically equate to good credit.

The Truth: Credit Scores Reflect Behavior, Not Income

A billionaire with a history of late payments will have a worse score than someone with modest income but excellent credit habits.

Myth 12: You Can’t Get Credit Without a Credit History

This catch-22 discourages many from even trying to build credit.

The Truth: Options Exist for Beginners

• Secured credit cards (backed by a cash deposit)
• Credit-builder loans (small loans designed to establish credit)
• Becoming an authorized user (on someone else’s account)

These tools help newcomers start building credit safely.

Myth 13: Renting a Home Doesn’t Affect Credit

Many assume only mortgage payments influence credit.

The Truth: Rental Payments Can Help—If Reported

While most landlords don’t report to credit bureaus, services like RentTrack or Experian Boost allow renters to add positive rental history to their credit files.

Myth 14: Bankruptcy Ruins Your Credit Forever

The stigma around bankruptcy leads some to avoid it even when it’s the best financial option.

The Truth: Recovery Is Possible

Bankruptcy stays on your report for up to 10 years, but its impact lessens over time. Many people rebuild their credit within a few years by:
- Getting a secured credit card
- Making on-time payments
- Keeping balances low

Myth 15: Credit Cards Are Always a Bad Idea

Fear of debt leads some to swear off credit cards entirely.

The Truth: Used Wisely, Credit Cards Offer Benefits

• Fraud protection (better than debit cards)
• Rewards (cash back, travel points)
• Convenience (especially for online purchases)

The key is discipline—don’t spend more than you can pay off.

Myth 16: Co-Signing Doesn’t Affect Your Credit

People often co-sign loans for friends or family without realizing the risks.

The Truth: Co-Signing Makes You Fully Responsible

If the primary borrower misses payments:
- Your credit takes the hit
- You may have to repay the debt
- It can limit your ability to get other loans

Only co-sign if you’re prepared to take on the financial burden.

Myth 17: Closing a Credit Card Erases Its History

Some think closing a card removes its history from their credit report.

The Truth: Closed Accounts Stay on Your Report

Positive history from closed accounts can remain for up to 10 years, but their absence may still hurt your score by reducing available credit.

Myth 18: You Should Max Out Cards to Increase Your Limit

A bizarre myth suggests that using most of your available credit will prompt issuers to raise your limit.

The Truth: High Utilization Hurts Your Score

Lenders prefer to see low utilization (under 30%, ideally under 10%). Maxing out cards signals financial distress and may lead to:
- Denied limit increases
- Lower credit scores
- Higher interest rates

Myth 19: Student Loans Disappear After 7 Years

Some borrowers believe student loans automatically fall off their credit report after a certain period.

The Truth: Student Loans Are Sticky Debt

Unlike other debts, student loans:
- Typically remain on your report until paid
- Can’t be discharged in bankruptcy (except in rare cases)
- May lead to wage garnishment if defaulted

Federal loans offer income-driven repayment plans, so explore options before assuming they’ll vanish.

Myth 20: A Perfect Credit Score Isn’t Worth the Effort

Some argue that once you have "good" credit, striving for perfection is unnecessary.

The Truth: Higher Scores Bring Better Terms

While 740+ often qualifies for the best rates, those with 800+ scores may:
- Get lower insurance premiums
- Qualify for higher credit limits
- Have an easier time renting apartments

Every point matters when negotiating major financial decisions.

Understanding these myths empowers you to make smarter credit decisions. By focusing on facts, you can build and maintain a strong credit profile—opening doors to better financial opportunities.