needs Kasheesh
Table of Contents
- Does carrying a balance improves your credit score?
- Does checking your credit report hurt your credit score?
- Does closing old accounts improve your credit score?
- Do you need to use your credit card frequently to build credit?
- Does your income affect your credit score?
- Do you only have one credit score?
- Can only rich people have high credit scores?
- Do debit cards and prepaid cards help build credit?
- Do young adults need to worry about their credit score?
Credit cards and credit scores are often misunderstood. There are a lot of factors at play when it comes to how these things function, so we don't blame anyone for having a hard time grasping it all —but misinformation can lead to poor financial decisions, so it’s crucial to separate fact from fiction. Here, we debunk nine common myths and misconceptions about credit cards and credit scores.
Myth 1: Carrying a Balance Improves Your Credit Score
Reality: Carrying a balance on your credit card does not help your credit score. In fact, it can hurt it. Credit utilization, the ratio of your credit card balances to your credit limits, significantly impacts your score. Keeping your balances low or paying them off entirely each month is better for your score, and using a tool like Kasheesh to split up big purchases across multiple of your cards can help you keep the balance on each card lower.
Myth 2: Checking Your Credit Report Hurts Your Score
Reality: Checking your own credit report is considered a "soft inquiry" and does not affect your credit score. It's wise to review your credit report regularly to ensure accuracy and catch any potential identity theft early. Only "hard inquiries," such as those from credit applications, can impact your score. Use free apps and tools like Experian and CreditKarma, to monitor your credit score weekly.
Myth 3: Closing Old Accounts Will Improve Your Score
Reality: Closing old credit card accounts can actually lower your credit score. Length of credit history is a big factor in your credit score, and closing an old account can shorten your average account age. Additionally, it reduces your available credit, which can increase your credit utilization ratio if you carry balances on other cards. So if you have a credit card with an annual fee you don’t want to pay anymore, call the credit lender and request to downgrade the account to a different no annual fee card instead.
Myth 4: You Need to Use Your Credit Card Frequently to Build Credit
Reality: Yes and no. You don't need to use your credit card excessively to build credit – but small, regular purchases that you pay off in full each month can help build a positive credit history. The key is consistent, responsible use, not frequency or amount of spending. But you should aim to use each of your credit cards at least once per month to avoid the risk of your credit card account getting closed due to inactivity. Which, as we just mentioned, can hurt your score.
Myth 5: Your Income Affects Your Credit Score
Reality: Your income does not directly affect your credit score. Credit scores are calculated based on your credit history, which includes factors like payment history, amounts owed, length of credit history, new credit, and types of credit used. While income is not a factor for your score, it is often considered by lenders when evaluating your ability to repay debts and determining how high of a credit limit you’ll be offered.
Myth 6: You Only Have One Credit Score
Reality: You have multiple credit scores. There are three major credit bureaus (Equifax, Experian, and TransUnion), each with its own scoring model. Additionally, there are different scoring models like FICO and VantageScore. Your score can vary depending on which bureau’s data is used and which scoring model is applied.
Myth 7: Only Rich People Can Have High Credit Scores
Reality: High credit scores are not reserved for the wealthy. Anyone can achieve a high credit score by practicing good credit habits. This includes paying bills on time, keeping credit card balances low, managing different types of credit responsibly, and avoiding unnecessary hard inquiries. Income is not a factor in credit scoring models, so financial discipline is key.
Myth 8: Debit Cards and Prepaid Cards Help Build Credit
Reality: Debit cards and prepaid cards do not help build your credit score because they are not reported to credit bureaus. Only credit accounts like credit cards, mortgages, and loans are reported. To build credit, you need to use credit products and manage them responsibly. If you’re unsure about how to use credit cards responsibly, tools like Kasheesh’s Smart Split feature can help you determine which cards to use during each purchase to keep your utilization rates low.
Myth 9: I Don’t Need to Worry About My Credit Score Until I’m Older
Reality: It's important to start building and maintaining a good credit score as early as possible. A good credit score can impact your ability to rent an apartment, get a job, or obtain favorable interest rates on loans. While you might not yet be thinking of things like loans or mortgages to buy a house, if you’re in your early 20s, a delinquency stays on your credit report for seven years and will have a lasting negative impact for many years. Starting young gives you more time to establish a positive credit history, which can benefit you throughout your life.
Conclusion
Understanding the realities behind these common credit card and credit score myths can help you make better financial decisions. Always strive to stay informed and consult credible sources or financial advisors if you're unsure. By debunking these misconceptions, you can manage your credit more effectively and avoid common pitfalls.
Learn more about how using Kasheesh can help you rebuild and maintain a better credit score.
