Credit, as we know it, has been around for a long time. Thus, the modern consumer credit system has given birth to a lot of information (and a lot of misinformation). Here are 5 myths about credit usage that have developed over time, and that you should know about.
"Checking my credit score will hurt my report."
Contrary to the rumors, you won’t lose points for an “inquiry” (a notation on your report saying it was checked), so long as the inquiry isn’t related to a credit application. Checking your score, though, won’t do any harm. Although you won’t get points for doing it, checking your score is a sign of responsible credit behavior. You can access your score using a credit score service, or by visiting a free credit scoring site.
"Lenders only use one score to check your creditworthiness."
There are many types of scores that lenders and businesses can use to check your credit. These are Custom credit scores, or Industry Option scores, which apply to specific types of lending. For instance, there’s the FICO Mortgage Score, the FICO Auto Score and the FICO Bank Card Score. They rely on information in a credit report, but also might look at different features and weigh them differently (For instance- specific account history, etc.).
"If I need to improve my credit, I should close the cards I’m not using."
If you have a credit card you’re not actively using, closing it won’t do you much good, and it could even lower your score. When you close an unused account, the amount of credit you have available goes down. This will raise your credit utilization ratio, i.e. the percentage of available credit you’re using. Since it’s best practice to keep your credit utilization down, closing a credit card won’t help.
"I can use FICO’s 45-day grace period to rate-shop for credit cards."
If you’re shopping around for a new mortgage or car loan, several lenders might pull your credit within a short timeframe. FICO will recognize you’re shopping, and will only penalize you with one inquiry on your report within a 45-day window. However, keep in mind that this rate-shopping grace period usually only applies to auto loans and mortgages. The scoring model can detect what types of credit you’re applying for- so if you’re applying for a dozen credit cards over a month or two, you’re likely to still incur a lot of hard inquiries that can decrease your credit score.
"Once a delinquent account is paid off, it is removed from my credit report."
Late payments will stay on your report for 7 years after the date of the payment was missed. A bankruptcy can stay on your report anywhere from 7 to 10 years, depending on the type of bankruptcy. If you don’t pay a past-due balance, your account could be sent to a collections agency. A collections account will remain on your report for 7 years, and even paying it off won’t have an effect on your credit score.