It’s safe to say the topic of credit can be confusing. But, credit doesn’t have to be an overwhelming or elusive concept. Educating yourself on common credit myths is a great starting point in developing good credit habits, so with that in mind, here are four credit myths you should know.
Your Increased Salary Improves Your Credit Score
Unfortunately, this one is a myth, as salary (or the money in your bank account, rather) doesn’t make a difference when it comes to your credit score. While you should strive to do well in your career, your salary is a separate point from credit altogether.
Paying Off Loans Immediately Improves Your Credit Score
So you’ve (finally) paid off your car. Congratulations! You’ve just removed a chunk of debt and are likely expecting some massive improvement in your credit score, right? Not necessarily.
Your debt can remain on your credit report for up to seven years, so if you paid off your car loan, or if you missed any payments, or couldn’t meet the minimum monthly payment on occasion, that information is probably going to stay on your report even after the debt is paid in full.
So while paying off debt is a great thing to strive for, and you should do that to avoid extra fees, make sure you don’t miss a single payment, because that is what will hurt your credit score.
Closing a Credit Card Improves Your Credit Score
Logically speaking, it makes sense that debt negatively impacts credit, so is closing a credit card a good thing? No! Credit can actually be improved through credit cards (we know, super confusing), though it can negatively impact it as well.
For instance, if you close an old credit card you never or rarely use, you may actually see your credit score decrease. You are reducing your “total available credit,” and your length of time you’ve had credit, which can negatively impact your credit utilization. These are all factors that go into determining your credit score. So, long story short, be strategic about when you open and close credit cards, as every action in this regard has an impact on your score.
Collections Payments Immediately Improve Your Score
Most of us have unfortunately had a bill sent to collections, and there’s nothing more frustrating. Whether by some misunderstanding, a missed minimum payment, or another extraneous factor, your credit score will show that negative impact when a bill is sent to collections.
That being said, paying off that collection debt in full should remove it from your score, therefore immediately improving it, right? Unfortunately, once again, this is wrong. Negative credit factors like having a bill sent to collections will likely remain on your score for seven or more years.
Obsessing over your credit score is more likely to result in more stress and anxiety than it is to improve it, so rather than shifting your entire focus to improving your score, make sure you are developing good credit habits. You can’t undo the past, but you can still write your future, which means there is plenty of time to learn the truth behind these myths and get your credit in check.