Credit plays a critical role in personal and business financial health, yet misconceptions about it are widespread. These myths can lead to costly mistakes and hinder financial progress. Let’s debunk the top three credit myths, explore their implications, and set the record straight.

Myth 1: Checking Your Credit Score Will Lower It

The Reality: Checking your own credit score is considered a soft inquiry, which has no impact on your credit score. Soft inquiries include actions like checking your score through a credit monitoring service, reviewing your credit card statement, or using a bank-provided credit tool. However, when lenders or creditors perform a hard inquiry (e.g., when you apply for a loan, mortgage, or credit card), it may lower your score slightly.

Why It Matters: Many people avoid checking their credit scores because they believe it will damage their credit. This misunderstanding prevents them from staying informed about their financial health. Regularly monitoring your credit score helps you identify errors, track progress, and take action to improve your credit.

Tip: Use free credit monitoring services offered by banks, credit bureaus, or third-party platforms like Credit Karma or Experian. Monitoring your credit report and score regularly ensures you spot discrepancies, like unauthorized inquiries or incorrect late payments, early on.

The Takeaway: Soft inquiries are harmless and essential for managing your financial well-being. Hard inquiries only matter when applying for new credit, so plan applications strategically to minimize their impact.

Myth 2: Carrying a Balance on Your Credit Card Builds Credit

The Reality: You do not need to carry a balance or pay interest to build credit. Your credit score is influenced primarily by factors such as on-time payments, credit utilization ratio, and the length of your credit history. Carrying a balance may instead lead to unnecessary interest charges and can trap you in debt.

Why It Matters: This myth can cost credit card users hundreds or thousands of dollars in interest over time. While credit cards are excellent tools for building and maintaining credit, the key is responsible use—not carrying debt.

Key Credit Factors:

1. On-Time Payments: Payment history accounts for 35% of your FICO score. Paying bills on time is crucial to maintaining a strong score.
2. Credit Utilization: This measures how much of your total available credit is being used. A low utilization rate (below 30%) is ideal.
3. Interest Costs: Carrying a balance leads to interest charges, which have no positive effect on your credit score.

Example: If you have a $1,000 credit limit, spending $200 and paying it off by the due date builds credit while keeping your utilization low. Carrying that $200 into the next billing cycle would accrue interest with no additional benefit.

Tip: Always pay off your credit card balance in full each month to build credit and avoid interest charges.

The Takeaway: Carrying a balance is unnecessary for building credit. Focus on timely payments and low utilization instead.

Myth 3: Closing Old Credit Accounts Will Boost Your Score

The Reality: Closing old credit accounts can actually hurt your credit score in two significant ways:

1. It shortens your credit history, which accounts for 15% of your score. Longer credit histories demonstrate financial stability and responsible credit use.
2. It reduces your total available credit, increasing your credit utilization ratio—a key factor making up 30% of your score.

Why It Matters: People often close unused or old accounts to “declutter” their credit profiles or avoid fees. However, this decision can backfire, especially for individuals who already have limited credit history or higher utilization.

Example: If you have three credit cards with a combined $10,000 credit limit and close an older card with a $5,000 limit, your total available credit drops to $5,000. If you’re using $3,000 across the remaining two cards, your utilization jumps from 30% to 60%, negatively impacting your score.

Tip: Instead of closing old accounts:

• Use the card for small, recurring purchases (like a subscription) and pay it off monthly to keep it active.
• Contact the card issuer to request a fee waiver or downgrade the card to a no-fee version if costs are a concern.

The Takeaway: Keep old accounts open to preserve your credit history and utilization rate. Closing accounts should only be done when absolutely necessary.

Why Understanding Credit Myths Matters

Believing in these credit myths can lead to poor decisions that damage your financial health. Here’s why debunking them is important:

1. Financial Awareness: Knowing how credit works empowers you to manage your score effectively.
2. Avoiding Unnecessary Costs: Understanding myths like the need to carry a balance prevents you from wasting money on interest.
3. Strategic Credit Building: Proper credit management practices help you achieve financial goals, whether it’s buying a home, securing a business loan, or qualifying for low-interest rates.

Key Takeaways

• Regularly check your credit score without fear of damaging it—soft inquiries are harmless.
• Carrying a balance on your credit card isn’t necessary; pay in full each month to build credit without interest charges.
• Keep old credit accounts open to maintain a longer credit history and healthier credit utilization ratio.

By separating fact from fiction, you can take control of your credit, make informed financial decisions, and pave the way for a secure financial future.