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5 Credit Myths and Your Financial Health

Erin OsterhausJanuary 23, 2023


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Your credit score is an integral part of your financial life. This number—which ranges from 300 to 850—gauges how reliable you are when it comes to paying back money, and therefore is a key factor for banks and credit unions when they determine what interest rate to offer you on mortgages and car loans. The higher your score, the better your potential access to lower interest rates, which, over the course of time, can save you thousands of dollars in interest payments.

But how can you achieve a high credit score? When it comes to building credit there are plenty of myths that can waste your time and even harm your efforts to raise your credit score. Put your financial future first by meeting with a financial counselor and learning the truth behind these common credit myths.

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Myth #1: All Credit Inquiries Hurt Your Credit

One of the most pervasive myths surrounding your credit is the idea that making a credit inquiry will always negatively impact your score. Not true!

There are two ways to check your credit score and differentiating between the two will help you keep your score climbing.

Soft Pull

Also known as soft inquiries or soft credit checks, these usually occur when a person or a company checks your credit as part of a general background check. These can happen when a potential employer checks your credit before hiring you, or when a credit card company checks your score without your permission to determine if you qualify for special offers.

Soft pulls are also used when you check your credit score yourself, either through a monitoring service or through one of the credit bureaus. It’s important to monitor your credit to protect yourself from identity theft. You’re entitled to a free credit report per year from each of the three nationwide credit reporting agencies—Experian, Transunion, and Equifax, which you can access at or directly through those bureaus.

A general definition for a soft pull: a credit inquiry that doesn’t involve taking out a loan or opening a new credit account.

Hard Pull

Unlike a soft pull, a hard pull or hard credit inquiry can impact your credit score—at least temporarily. Hard pulls occur when a financial institution, such as a mortgage lender or credit card company checks your credit when making a decision to lend to you or not. Usually, a single hard inquiry may lower your credit score a few points or not at all. If you’re applying for something like a mortgage, you have the opportunity to have several hard inquiries made on your credit without suffering a credit score loss every time (they all count as one, within a certain time frame).

However, it’s best to refrain from multiple inquiries over a short period, like applying for a new credit card every month. This kind of activity raises a red flag, as it could imply that you’re low on cash or planning to rack up a lot of debt in a short amount of time—all things that make you a higher risk customer.

A general definition for a hard pull: a credit inquiry that is used to retrieve your credit history and score, performed because you’re taking out a loan or opening a new credit account.

Myth #2: Paying Your Utility Bills on Time Builds Credit

We have a mixed answer here.

  • Unfortunately, there’s no direct way to self-report those payments.
  • If your utility or cell phone provider is considered a “data furnisher”, they may be reporting payments to the three credit bureaus—it may be useful to ask your providers directly.
  • You can use paid services to have your utility and bill payments reported to the bureaus, but there’s no guarantee that these services are reporting items that aren’t already being reported. In other words—you might be paying for something that’s already happening.

This answer is very individual. If you’re short on credit history and very responsible with bill payments, it’s well worth asking your providers if they can report your information.

Myth #3: Closing a Credit Card Improves Your Credit Score

Closing any line of credit or loan can actually hurt your credit score.

Part of your credit score relies on something called “credit utilization rate”. Simply described, this is the ratio between how much credit you have, and how much money you’ve borrowed. The ideal is to keep as much credit available and as little money borrowed as possible, to keep the ratio low.

When you close an account, you’re lowering your total available credit—thereby making your credit utilization ratio higher. Most lenders like to see a credit utilization ratio under 30%, with a lot of lenders only giving premium interest rates for ratios under 10%. Consider these examples:

  • Alan has one credit card with a $1,000 credit limit. His current balance is $500, and as a result, his credit utilization is 50%.
  • Bea also has two credit cards. She also has a current balance of $500, but her credit limit across both accounts is $2,000. At 25, her credit utilization ratio is consider better.

Is credit utilization the only factor in a credit score?

It’s one of five main areas of your financial history that the credit bureaus use to determine whether you are trustworthy with borrowed money: payment history, credit utilization, length of credit history, types of credit, and new credit/inquiries.

While each bureau keeps the scoring models a secret, credit utilization is the second most important factor for all three bureaus. The lower your credit utilization, the better for your overall score.

With a higher total credit limit, you generally enjoy a much lower credit utilization ratio, which helps keep your credit score high. So if your card is always paid off and has no annual fee, it’s actually more beneficial to keep it open!

Myth #4: Paying Off All Debt Improves Your Credit Score

While paying off debt affects your credit score, the type of debt plays a key role in whether it will improve your credit score.

Paying off “installment” debts, such as your mortgage, car loan, or student loans might actually lower your credit score slightly, as it means you have fewer credit accounts, and therefore a higher credit utilization score.

However: that doesn’t mean you shouldn’t pay off those types of loans, as the money you’ll save in interest payments more than makes up for the temporary decrease in your credit score. You’ll likely see your score go back up within months, though it can take longer.

Credit card debt is different—because it’s “revolving”, or always open, paying off a credit card will never hurt your credit score. When you pay your credit card balance, you lower the amount of credit you’re using—which can help increase your score and save you money in interest payments.

Myth #5: Poor Credit is Eliminated After Seven Years

One of the most pervasive myths is that all delinquent accounts come off your credit report after seven years.

We have another mixed answer for you: many negative items will fall off your report after seven years—things like late payments, debt collections, and charge-off accounts. However: there are types of debt that stick around, like Chapter 7 bankruptcies and student loans.

And even if something has fallen off your report—it doesn’t mean that the debt collector can’t sue you to recoup loss.

Don’t depend on the “seven-year rule” to make your delinquent accounts disappear.

Build Healthy Financial Habits

While it’s important to know the myths surrounding what does and does not impact your credit score, the best way to build your credit—and your financial security—is to cultivate good financial habits. Living within your means is the best thing you can do to ensure a happy and healthy financial life—one where your credit score will likely go up automatically.

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Erin Osterhaus

Erin is a personal finance writer based in Austin, Texas. Her work has been featured on TechRepublic, Yahoo Small Business, and She’s been passionate about helping others manage their money since she successfully paid off $60,000 in student loans in four years. When she’s not writing, Erin loves reading, studying languages, and spending time with her family.