Credit
January 5, 2016

4 Credit Myths You Should Ignore

Simple. Thrifty. Living.

The state of your credit has a big effect on your ability to rent housing, qualify for insurance and get good interest rates on loans. Unfortunately, the importance of credit leads to a lot of chatter, and some credit myths get passed around so often they start to sound true. Here are four credit myths that you can safely ignore:

Nope. Keeping track of your own credit report is part of handling your finances responsibly, and there’s absolutely no downside to checking on it. You are entitled to a free copy of your own credit report once each year from each of the three credit reporting agencies, through a safe, non-commercial federal consumer website called annualcreditreport.com. Financial experts recommend requesting your credit report from one of the three bureaus every four months, so that you maintain a year-round awareness of the information on those reports. You can also sign up for a credit report monitoring service without doing damage to your credit.

If you think about it, this belief doesn’t even make sense. Lenders are interested in seeing how responsibly you handle debt. If you’re able to pay the entire balance on your credit card each month, that lowers your debt-to-income ratio, which is a good thing. Carrying a credit card balance won’t have a positive effect for anyone except your lender, who gets to enjoy all the interest you’re paying them.

Actually, older credit card accounts are more valuable in the eyes of the credit bureaus, because they show your track record — but it’s not generally beneficial to close any credit card accounts. The reason is that you improve your credit score by keeping your debt below 30 percent of your credit limit. If you have $10,000 of credit available to you, your balance should ideally never go above $3,000. If you closed out one of your credit cards and reduced your available credit to $5,000, then you would want to make sure you didn’t push your balance over $1,500 in order to maintain a good ratio.

Interestingly, your income by itself has no effect on your credit score. If you earn a tiny income but keep your debt below 30 percent of your available credit and pay every bill on time, you will have a much better credit score than an irresponsible high earner.

Your credit score can make a big difference in your financial well-being, and it’s important to avoid becoming confused by persistent credit myths. Protecting your credit is one of the most fundamental building blocks to creating a prosperous future.

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