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3 Common Credit Myths that Could Damage Your Score

A NerdWallet survey finds that Americans aren’t aware of the basics of credit, which could affect the credit score of their loved ones.

Written by Erin El Issa Senior Writer | Personal finance, analysis of data, credit card Erin El Issa writes data-driven studies on personal finances, credit cards investments, travel, as well as student loans. She is a fan of numbers and hopes to make data sets understandable to assist consumers in improving their finances. Before becoming an Nerd in 2014, she was an accountant for tax and freelance personal financial writer. Erin’s work has been cited in The New York Times, CNBC, on the “Today” show, Forbes and elsewhere. In her free moments, Erin reads voraciously and is unable to keep on top of her two children. Erin is from Ypsilanti, Michigan.

Oct 4 2022

Editor: Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years at The Oregonian in Portland in positions such as copy desk chief and team leader for design and editing. Previous experience included editing copy and news for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor’s degree in mass communication and journalism at the University of Iowa.

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Financial misinformation is rampant, and it could be hurting the credit rating of your. Finds that Americans are prone to misconceptions regarding their credit, some of which could seriously damage their scores. Here are three common credit score myths and ways to avoid them.

Myth 1. The fact that you have a open balance with your credit card good for your credit score

It’s a common credit myth: Nearly half of Americans (46%) believe that carrying an unpaid balance on their credit card is more beneficial for their credit rating than paying for it off in total, as per the survey. However, carrying a balance won’t improve your credit score and could actually be detrimental when the balance represents more than your available credit limit. This is because it can increase the amount of credit you use (the extent to which your limit of credit is you use) and can negatively impact your score.

Another downside to leaving an unpaid balance on your credit card is the interest expense. Credit card debt — that you are liable for if you leave an unpaid balance on your credit card, even if intentionally -is among the most costly types of debt due to two-digit interest rates. Although you might think leaving a small balance on your account wouldn’t be expensive, it could be because of .

If you don’t pay off the entire balance by deadline, the interest is charged, but not only on the balance remaining. It’s calculated according to an average day-to-day balance of your credit card. For instance, if you have an account with a balance of $10 on your credit card but the average daily balance of your card during the course of the month was $1,000, interest is added to the balance of $1,000.

You can combat this by paying off the balance by or before the due date. This could reduce your credit utilization and the monthly cost.

Myth 2. The closing of a credit card that you don’t use is good for your credit

The study found that close to fifty percent of Americans (46%) believe that the closing of a credit line they don’t use is beneficial to improve their score on credit. The idea of keeping a financial product you don’t use isn’t logical however, closing your credit card can damage your score.

Closing a card may ding your credit score by increasing the amount of credit you use. There are many reasons to , generally the disuse of a credit card isn’t enough of a reason to suffer the financial burden.

If you don’t end up cancelling any credit cards, your issuer will eventually shut down accounts that aren’t utilized for a specific period of time. To prevent this from happening it is possible to charge an unimportant recurring costsuch as an annual subscription to your card and create autopay to wipe out the credit card balance each month.

Myth 3. A credit report won’t affect your credit score

Over a quarter of Americans (28%) don’t realize that a lender conducting credit checks can make their credit score go down, according to the survey. There are two types of credit checks, the hard inquiry and the soft inquiry. When you check your credit it’s considered a soft inquiry and doesn’t affect your score. But when a lender checks your score to determine your creditworthiness for a financial product this is a , and your score could go down.

There are some exceptions. For example, for some financial instruments, such as a mortgage or auto loan multiple inquiries within a short time frame count as an individual hard inquiry. The amount of time will vary based on the credit scoring model, but it’s best to submit all applications within two weeks. This is known by the term “rate shopping” and allows you to shop around for the most favorable loan terms.

However, applying for multiple credit cards in a short amount of time isn’t considered rate shopping and could result in an investigation for every application. Therefore, restricting the number of applications you submit is a good idea. Hard inquiries can stay on your credit report for up to two years. Therefore, before you apply for another credit card, be sure it’s accessible to people within your credit score range.

Author bio Erin El Issa is a credit cards expert and a writer for studies at NerdWallet. She has had her work featured by USA Today, U.S. News and MarketWatch.

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