Credit Score Myths You Should Know About

by TK on March 25, 2021

If you want to avoid credit problems down the road, it is important to separate fact and fiction when it comes to your credit.  Here are some of the biggest credit card myths today.

Myth: Being late on your debt obligations hurts your credit score

Fact: Being late on your credit card or other debt obligations will not hurt your score until it is at least 30 days late.  That means, you can be 15 days late on your credit card payment and it will not lower your score a bit.  Credit reporting agencies (CRAs) only calculate late payments according to three categories: 30 days late, 60 days late, and 90 days late.  So being 31 days late is the same as being 59 days late.  And being 61 days late is the same as being 89 days late.  Obviously, being 30 days late on your payment will hurt a lot less than a 90 day late payment.  However, with the new FICO 08 scoring system, being late on your credit report once won’t hurt your score if all your other accounts on your credit report are in good standing.

 

Myth: Paying off collection accounts will increase your score

Fact: Once the collection account is reported to the credit reporting agencies, it is going to stay on there regardless if you pay it off or not.  Actually under the old FICO scoring system, paying off a collection account can actually hurt your score if the collection account is old.  That is because paying an old collection account effectively renews the debt according to the credit reporting agencies.  However, the new FICO scoring system (FICO 08) distinguishes between an old debt payment and a new debt payment so it won’t hurt your score.  It just won’t help it.  But from a lender’s standpoint, paying off a collection account can show some goodwill and reflect positively upon you when you are applying for a loan.

 

Myth: Collection accounts hurt your score

Fact: This used to be universally true.  However, with FICO 08, collection accounts under $100 do not affect your credit score.

 

Myth: You need to carry a balance in order to get a good credit score

Fact: I don’t know if this myth was secretly perpetuated by the credit industry to increase credit usage or not but this is absolutely not true.  However, you do need to use your credit card every once in awhile though.  Just pay it off in full each month so you don’t carry a balance—you do not need to carry the balance.

 

Myth: Closing a credit card account can hurt your credit score

Fact: This is somewhat true but let me explain.  The length of your credit history is a factor in your credit score.  The length of your credit history is actually 15% of what makes up your credit score.  So if you are closing an old credit card, you are effectively wiping the history you’ve had with that credit card.  However, if you have enough history with credit, cancelling one or two new cards will not impact your score in and of itself.  What may impact your score (indirectly) is your credit utilization ratio.  For instance, let’s say you have 5 cards.  The credit limit on each of your 5 cards is $4,000 each.  Let’s say that you have a of $2,500 each on two of your oldest cards (totally $5,000 credit balance).  So you decide to cancel the two newer cards.  Your credit utilization before cancelling the two cards was 25% ($5000 divided by $20,000).  But now that you’ve closed two cards, your credit utilization is 41% ($5,000 divided by $12,000).  Having a credit utilization jump from 25% to 41% will certainly hurt your score.  No one knows exactly but FICO likes to see a credit utilization of no more than 35%.  So when cancelling a card, make sure that your credit utilization is still low without the cancelled cards.

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