Debunking the Biggest – and Most Damaging – Credit Score Myths

Too many Americans are off balance when it comes to their credit scores and that’s understandable.

After all, there are myriad differences in credit score models and the way those models are used by credit scoring agencies (who don’t always work off the same blueprint, leading to variations in consumer credit scores which adds to the confusion.)

Case in point. According to a recent survey by GoBankingRates over 40% of respondents surveyed couldn’t answer basic credit score questions accurately.

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That’s a problem, as confusion about credit scores can easily lead to lax financial habits, which lead to weaker credit scores and more closed doors when it comes to getting loans and credit. For example, lower credit scores can mean getting rejected for a home or car loan, or even for auto insurance, an apartment, or a cell phone.

The way forward for Americans looking for more clarity on their credit scores? Don’t fall for the myths and falsehoods that often accompany credit score issues.

Let’s debunk the worst offenders.

Myth #1: To build or rebuild your credit rating, you should close old accounts or any account you’re not using.

The Truth: Closing accounts, regardless of their current status, won’t help your credit rating and will more likely hurt it.

“By closing an account, you can lower your balance-to-limit ratio (known as the utilization rate), which can account for 30% or so of your credit rating,” said Todd Christensen, an accredited financial counselor at Money Fit in Boise, Id.

Myth #2: Credit scores unfairly hurt those with low income.

The Truth: Income is not a factor in your credit rating.

“It’s not permitted on your credit report, and if it’s not on your credit report, it’s not a factor in your score,” Christensen said.

“I’ve worked with individuals who had very meager incomes and yet still had excellent credit, while I’ve worked with individuals earning three or four times the median income but who still had terrible credit.”

Myth #3: You have to carry a balance to build credit.

The Truth: “This may be the most damaging myth of all,” Christensen said. “By carrying a balance, you automatically make your credit more expensive by incurring interest charges on cards that otherwise would have a grace period and not charge you interest,” he said.

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Myth #4: Checking your credit score can hurt your overall credit score.

The Truth: This is just not the case.

“There is a constant need for you to always check your score to see possible lapses and monitor your financial progress,” said Allan Borch, founder of the personal financial web site, Dotcom Dollar. “As long as you check your credit score from a legit source, it won’t hurt you.”

Myth #5: Closing your credit card is the best way to solve your financial problems.

The Truth: “Abruptly closing your credit card can affect your credit utilization ratio, which weakens your credit score,” Borch said.

Myth #6 : I pay my bills on time, so I don’t need to check my credit report.

The Truth: This may be one of the most deceptive myths on the list, mainly because credit report errors afflict all financial consumers, and must be factored into the equation.

“According to a study, as many as 40 million Americans have errors on their credit reports,” said Edward Araujo, president of Texas Consumer Credit Services, in El Paso, Tx. “In 20 million of these cases, the mistakes are described as “significant”. Any error on a credit report should at the very least, be considered an important item that needs to be corrected.”

“Would a potential lender or creditor agree that an incorrect address or name is an “insignificant” error?” Araujo added. “Perhaps an even worse scenario to consider is the possibility that any error could be the result of an attempt at identity theft. Consequently, regardless of how well you manage the payment of your monthly bills, consider checking your credit report regularly.”

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Myth #7: Outstanding medical or utility bills won’t affect my credit

The Truth: Although medical or utility bills are not reported on your credit reports, outstanding medical or utility bills that have gone into collections may indeed be reported to credit bureaus by the collection agencies.

“These can be very damaging to your credit since they may remain on your credit report for a long time before even being discovered,” Araujo said. “Be especially careful with medical bills, as these are notorious for being sent into collection after a very short period of time.”

Myth #8: Bankruptcy always hurts credit scores.

The Truth: The reality is that, on average, bankruptcy helps credit scores, said Carlo Sabatini, a bankruptcy attorney with Sabatini Freeman, LLC in Dunmore, Pa.

“According to data from Federal Reserve Bank of Philadelphia (Credit Score Before and After Bankruptcy Discharge) the average credit score for a Chapter 7 bankruptcy filer actually increases by about 50-to- 80 points during the three-to-six-month period that immediately follows the bankruptcy filing,” Sabatini said.

“The myth that a bankruptcy will always damage a credit score is so dangerous because the myth deters large numbers of people from filing bankruptcy cases that could substantially improve their financial situation,” he added.

Your Best Tips in Getting a Debt Consolidation Loan

Make sure you have the best credit score possible before applying for a consolidation loan, before you apply for a debt consolidation loan.

“These loans are not very easy to qualify for, since you are combining smaller debts into one larger loan,” Selita said. “Due to the size of the loan, lenders will look to be more risk averse and typically seek “good credit applicants.”

Boost your credit worthiness by leveraging a credit score acceleration tool like Experian Boost to pump your credit score for the short-term. In addition, make sure your credit utilization rate is as low as possible before you apply for the loan.

“One easy way to do that is to zero out any balances on smaller credit card accounts you have and make sure they are reporting the lowest possible utilization on your credit report at the time of application,” Selita said.

Also, don’t be afraid to negotiate.

“Often times you can negotiate down origination fees and any other finance charges including in the loan,” Selita noted. “Try to get a loan that has no pre-payment penalties. This way, if you do get a windfall of cash, you can pay the loan off early and forego the rest of the interest charges due.”

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Brian O’Connell

Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.