Despite how important credit is, your three-digit score can be a bit of a mystery. How it gets calculated and what affects this number isn’t always clear. You can wind up believing half-truths and out-right lies about this financial stat, which can lead to making poor decisions that lower your score.
Today, let’s debunk some of the most common misconceptions about credit. This list will help you separate fact from fiction and insulate your score.
1. Keeping a Balance is a Good Idea
Carrying over a balance on a line of credit or credit card is a persistent myth that can harm your score. Carrying over a balance increases your utilization ratio, which shows how much of your available limits you use. The closer this ratio is to zero, the better.
That’s why the cash advance specialists at MoneyKey recommend borrowers use a budget to make more than the minimum payment. Paying as much as you can helps lower your balance faster and may reduce the interest and finance charges you accrue.
2. You Can’t Borrow with Bad Credit
The word “can’t” is inaccurate in this case. Financial advisors recommend you don’t borrow when your score is low because it costs more. You’ll save money by waiting to take out a short-term personal loan until you raise your score.
Life doesn’t always play by the rule book, unfortunately. Sometimes, you’ll need to borrow in an emergency, like when you’re stuck replacing a blown tire when you have zero savings.
In these special circumstances, you can find installment loans for bad credit that you may qualify for despite your lousy score. Take the time to compare your options—this extra leg work can help you find the best deal despite the higher costs.
3. A Big Credit Limit Will Damage Your Credit Score
Some people are leery of increasing their limits, worried that this decision will negatively impact their score. But the upgrade has a good chance of improving this number, provided you use the account responsibly.
Why? Because a higher limit affects your utilization ratio, even if you don’t make any changes to your spending habits. Your usual spending will take up less of this new limit and produce a lower ratio.
That said, a higher limit can tempt you to spend more than you can afford. If you’re worried you wouldn’t be able to ignore this temptation, don’t accept the increase. Rejecting this offer won’t affect your score as long as you manage your usage carefully.
4. Every Loan or Cash Advance Affects Your Score
You might have a few cash advances and installment loans in your name, but they won’t all affect your score. Not all lenders will report your payment history to Equifax, Experian, and TransUnion. Although most will, others will only alert these bureaus if you fail to pay on time.
Paying your cash advances and installment loans on time is important, regardless of how your lender reports your payments. This rule of thumb will keep any bad information from being shared with the bureaus.
What you don’t know can hurt you. By believing these common misconceptions, you can inadvertently make decisions that lower your score. Now you know the truth behind credit, apply these rules to the way you handle your finances.