Credit-Building Myths

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There is a lot of misinformation out there when it comes to building and maintaining a good credit score, so it’s important to be mindful of the following credit-building myths.

1. To build credit, you’ve got to use lots of it!

Many insist that the only way to establish good credit is to use it. While it’s true that utilizing some level of credit is important, more is definitely not better. “Carrying a high balance on your credit card has the potential to hurt your score,” says Stephen Rosen, head of sales at the mortgage company Better. “And on top of that, you will end up paying more each month, due to interest.”

Credit utilization, or the amount of credit you’re using, makes up 30% of your FICO score. The higher your credit card balance, the higher your utilization rate, which hurts your credit score. That said, keeping a modest credit card balance can help, Watanasuparp says. A good rule is to use only 30% to 40% of your maximum credit line.

2. Close your credit cards once you pay them off

Closing a credit card once you’ve paid it off may seem like a logical thing to do—that way, no more debt! Yet in reality, closing cards is a bad idea and we advise you to steer clear of these credit-building myths.

“Closing recently paid off accounts can shorten your credit history, especially if it’s one of your oldest accounts to date,” Rosen says. Credit history, or how long you’ve had credit accounts, makes up about 15% of your credit score.

3. Occasional late or missed payments are no big deal

Late or missing bill payments happen to just about everyone, and therefore may seem like no big deal. However, paying your bills on time has a huge effect on your credit, making up 35% of your FICO score. It doesn’t matter how much credit you have, as long as you can afford to pay them in full and on time.

4. You can boost your credit score by adding your spouse to your accounts

If your spouse has excellent credit— but yours is subpar—you may have heard that adding your upstanding partner to your own credit accounts will help raise your own score. It’s not necessarily that simple. Credit scores are unique to each individual, Rosen says, so merging accounts won’t necessarily raise your credit score. However, there is one way a high-scoring partner does work in your favor.

“When it comes to applying for new credit with your partner, such as filling out a joint application for a mortgage, each partner’s credit score is taken into consideration by the lenders,” he says. Lenders will often use an average of a couple’s scores to determine overall creditworthiness as a team. So in this sense, your partner could help you get a loan with good terms.

5. Getting a credit report lowers your score

Checking your credit yourself through an official report from one of the primary reporting agencies is a soft inquiry, which won’t affect your credit score. However, loan applications for new credit cards or mortgages are considered hard inquiries and will stay on the report for up to two years, briefly lowering your score.

“My advice is to avoid loan applications for at least six months before you apply for a mortgage. This will ensure your best possible credit score is on file,” Rosen says.

There are many credit-building myths out there and these are just a few. Consider speaking with a professional about how to best build your credit to purchase the home of your dreams.