5 financial myths that may be hurting your credit

How to Save on Your Credit Card Bill
How to Save on Your Credit Card Bill

Common financial myths persist among a large segment of the population, and that may be hurting Americans' credit scores, a recent NerdWallet survey found. When asked about how a number of basic actions would affect a person's credit – including canceling a card, carrying a balance or paying a bill late – the majority of Americans answered incorrectly.

Let's dispel these myths with facts and tips to help you improve your credit health. Having good credit can save you money through lower annual percentage rates on loans and better insurance rates, and can make it easier to rent an apartment and even get a job.

Myth No. 1: Carrying a balance from month to month helps your credit score.

Truth: The lower your balance, the better. Aim to keep credit utilization low for a high credit score.

Over half of those surveyed (54 percent) didn't know that carrying a credit card balance does nothing to help a person's score. In fact, carrying a balance is both unnecessary and costly. You'll likely pay double-digit interest rates on your debt and get no benefit to your credit score. What does help a score is lowering your credit utilization – that is, how much of your available credit you're using.

What you should do: Having a credit card and using it regularly is important for good credit health. You need to make only the minimum payment to keep your account in good standing, but your best move is to pay the balance in full every month to keep your utilization low and avoid paying interest.

[See: 12 Simple Ways to Raise Your Credit Score.]

Myth No. 2: Closing an older, paid-off card helps your credit score.

Truth: Closing a card reduces your available credit, which increases your utilization.

Almost 8 in 10 Americans surveyed (78 percent) didn't know that closing an older, paid-off credit card hurts a person's credit score both in the short and long term.

The short-term impact is that it reduces your overall available credit, which results in higher utilization. For example, say you have two credit cards, each with a $5,000 limit, and a total monthly balance of around $2,000. This is a 20 percent credit utilization. However, if you close one of those cards, your utilization jumps to 40 percent.

The long-term impact is that the average age of your credit accounts will be reduced. A closed account remains on your credit report for 10 years, but its impact on your credit score diminishes as time goes on. This means you'll lose the positive impact that a paid-off credit card in good standing has on your score.

What you should do: If your old card doesn't have an annual fee, leave it open. To keep it active, set up a small recurring charge on the account, like a Netflix subscription or Starbucks card reload, and automatically pay it off from your checking account each month.

[See: 12 Ways to Be a More Mindful Spender.]

Myth No. 3: Paying a bill late always hurts your credit score.

Truth: If you pay your bill within 30 days of the due date, it likely won't hurt your score.

Only 8 percent of Americans knew how paying a bill late affects a credit score. If you've ever forgotten a bill and paid it a few days late, it probably wasn't reported to the credit bureaus. Generally, creditors don't report late payments if they're less than 30 days late, so if you pay within a month, your score probably won't be affected.

Of course, there are downsides to paying a bill late that aren't score-related. Late payment fees are standard on most cards, and some issuers impose higher annual percentage rates as a penalty on those who pay late. There's also the risk of getting into bad habits. If you pay late once and it doesn't hurt your credit in a significant way, you may do it again and again. You could rack up unnecessary fees and potentially forget to pay within the 30-day window, which could harm your credit score.

What you should do: Pay your credit card bill on time, every time. But also know that if something happens and you do pay a few days late, your wallet may take a hit, but your credit score likely won't.

Myth No. 4: Carrying multiple credit cards directly affects your credit score.

Truth: The number of cards a person has isn't factored into credit scores.

More than 9 in 10 Americans (91 percent) didn't realize that having several different credit cards doesn't have a direct impact on a person's credit score. Although there are indirect effects of owning multiple cards – both credit-related and otherwise – the simple fact of carrying several cards neither helps nor harms your FICO score.

Applying for a new credit card can ding your score. But having several cards also lowers your credit utilization by increasing your overall available limit. Carrying multiple cards also allows you to optimize your rewards strategy and provides you with a backup option if your primary card is lost or stolen.

What you should do: If you're in the market for a new card, space out applications by at least six months to minimize any credit-score impact. But don't be concerned if you have quite a few cards in your wallet, since that alone isn't a factor in your FICO score.

[See: 10 Foolproof Ways to Reach Your Money Goals.]

Myth No. 5: You have three credit scores, one from each bureau.

Truth: A consumer can have hundreds of credit scores, but they aren't all equally valid.

Only 9 percent of Americans knew that most consumers have more than three credit scores. There are three major reporting bureaus – Experian, Equifax and TransUnion – so it's likely that consumers think each of these bureaus calculates one score, but that isn't the case. While credit reporting data are taken from these three bureaus, there are lots of different scoring models, and not all of them are widely used by lenders.

The most popular scoring model is called FICO; when a potential lender pulls your credit score, it's probably one of your FICO scores from the three major bureaus. The scores offered by free scoring sites typically are calculated using the VantageScore model. Although these scores indicate your overall credit health, they probably aren't the same numbers your creditors are seeing.

What you should do: You can purchase your FICO scores directly from the major credit bureaus for about $10 to $20. Make sure you are buying the FICO versions, not the proprietary scores offered by each of the bureaus. You can also check your credit card statements; many issuers now offer customers free FICO scores from one of the bureaus.

Related: The worst cities for saving money

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