Financial misinformation is rampant, and it could be hurting your credit score. A new NerdWallet survey finds that Americans hold many misconceptions about their credit, some of which could seriously damage their scores. Here are three common credit score myths and how to guard against them.
Myth 1. Leaving a balance on your credit card is good for your score
This is a sticky credit myth: Nearly half of Americans (46%) think leaving a balance on their credit card is better for their score than paying it in full, according to the survey. But carrying a balance doesn’t help your credit and can, in fact, be harmful if the balance is a large percentage of your available credit limit. That’s because it increases your credit utilization (the amount of your credit limit in use), which significantly influences your score.
Another drawback of leaving a balance on your credit card is the interest expense. Credit card debt — which you have if you leave a balance on your card, even if intentionally — is one of the most expensive types of debt due to double-digit interest rates. And while you might think leaving a small balance on your card wouldn’t be that costly, it can be because of how credit card interest is calculated.
If you don’t pay off your entire balance by the due date, interest is assessed, but not just on the remaining balance. Instead, it’s calculated on the average daily balance on your credit card. So if you leave a $10 balance on your credit card, but the average daily balance on your card over the month was $1,000, interest is charged on the $1,000 balance.
You can combat this by paying off your balance on or before the due date, which may lower your credit utilization and monthly costs.
Myth 2. Closing a credit card you don’t use is good for your credit
The survey found that close to half of Americans (46%) think closing a credit card they no longer use can help their credit score. Keeping a financial product you aren’t using seems counterintuitive, but closing a credit card can damage your score.
Closing a card may ding your credit score in two ways: increasing your credit utilization and decreasing the average age of your accounts. And while there are reasons to close a credit card account, generally, disuse isn’t enough of a reason to take the credit hit.
Even if you don’t cancel your credit card, the issuer will eventually close any account that’s not used over a certain period. To combat this, you can charge a small recurring expense — like a monthly subscription — to the card and set up autopay to wipe out the credit card balance each month.
Myth 3. A credit check won’t impact your score
More than a quarter of Americans (28%) don’t realize that a lender running a credit check can make their credit score go down, according to the survey. There are two types of credit checks, a hard inquiry and a soft inquiry. When you check your credit, it’s a soft inquiry and doesn’t affect your score. But when a lender checks your score to determine creditworthiness for a financial product, it’s a hard inquiry, and your score can go down.
There are some exceptions. For example, for certain financial products, such as a mortgage or auto loan, several inquiries made in a short period count as a single hard inquiry. The amount of time varies by credit scoring model, but it’s safest to submit all applications within a two-week period. This is known as “rate shopping” and allows you to shop around for the most favorable loan terms.
However, applying for multiple credit cards in a short period doesn’t fall under rate shopping and will result in a hard inquiry for each application. For this reason, limiting the number of card applications you submit is a good idea. Hard inquiries can stay on your credit report for two years, so before applying for a new credit card, make sure it’s available to consumers in your credit score range.