Myth #4: Demographic Information Impacts Credit Scores
Not only are gender, race, nationality and marital status not included when calculating credit scores, the Equal Credit Opportunity Act (ECOA) does not allow demographic information to be considered by lenders. The scoring system is designed to provide an objective assessment of an individual’s credit worthiness by removing any factors that could lead to discriminatory practices. The focus remains on your credit history and how consistently you pay your bills on time.
Myth #5: You Should Keep a Credit Card Balance to Improve Credit Scores
Carrying a credit card balance can, in fact, harm your credit score because it increases your credit utilization. Credit utilization measures the amount of the credit limit that you have in use. If your credit balance represents a large amount of your available credit, your credit score could be impacted significantly. Credit card balances also lead to high interest costs due to the double-digit interest rates that are often attached to credit cards. Paying your credit card balance in full before the due date each month may lead to both lower monthly expenses and improved credit utilization ratings.
Myth #6: You Should Close Credit Cards to Increase Credit Score
If you are considering closing a credit card you no longer use, think again. While there are reasons you may want to close a credit card such as high annual fees or poor customer service, first consider the impact it will have on your credit score. When you cancel or close a credit card, you affect the length of your credit history and increase your credit utilization rate. These are both factors that largely affect the strength of your credit score.
Myth #7: Your Credit Score Will Decrease If You Check It
Credit checks come in two forms: soft inquiries and hard inquiries. Checking your own credit, for instance, is considered a soft inquiry and does not affect your credit score. Hard inquiries, such as when a lender pulls your credit report, can lower your score. However, some exceptions exist. Multiple inquiries within a short period of time for auto loan or mortgage rate shopping will only count as one hard inquiry. This allows you to shop multiple lenders for the most favorable terms. Yet, applying for several credit cards at once will result in multiple hard inquiries on your credit report.
