Sydney Enzler, 24, (not pictured) got her first credit card at 19 years old in order to build … [+]
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Sydney Enzler opened her first credit card when she was a 19-year-old college student. Her mom encouraged her to open the account in order to build credit and establish a strong credit score.
“I wanted to use my credit cards every once in a while to build credit, but I generally just use them for larger purchases,” said Enzler.
Now 24 years old, Enzler is one of the millions of Americans who owe a collective $1.1 trillion dollars in credit card and other revolving debt. According to the Federal Reserve, the average interest rate on those credit card balances is 16.97% APR.
With interest rates that high, it’s easy to see how credit card debt can quickly spiral out of control and leave you with a bruised wallet – and ego. The reality is that credit cards aren’t going anywhere, and they play a large role in determining your credit score – a critical factor when it comes to getting the lowest possible interest rate on your mortgage or other loans.
Today, I am dispelling three common credit card myths so that you can focus on the things that will actually improve your credit score.
Myth 1: Carrying A Small Credit Card Balance Is Good For Your Credit
I applied for my first credit card shortly after my 18th birthday and I remember being told by a well-meaning colleague at work that I should try to use the card regularly and carry a small balance. The rationale was that by using the card and paying a small amount of interest monthly, the bank would love having me as a customer and give me a better credit score.
Fortunately, I was a curious teenager and fact-checked that claim, because it’s not true. And not following that advice has saved me hundreds, if not thousands of dollars in unnecessary interest charges over the years.
To begin, your credit score is not determined by your credit card company or any other lender. Your credit card issuer (in my case it was Chase), provides the credit bureaus with regular updates on your payment and account history. These credit bureaus (Equifax, Experian and TransUnion) simply receive information from your lenders and use it to calculate your credit score.
Second, carrying a balance on a credit card will increase your utilization, which could actually lower your score. In general, using less of your available credit is better from a credit score perspective.
The important lesson here is that it’s never wise to pay interest on your credit card if you can avoid it. Always pay off your full statement balance in full if possible. It will help you lower your credit utilization while avoiding costly interest charges.
(Read: The 60 Second Guide To Credit Utilization.)
Myth 2: Checking Your Credit Report Will Hurt Your Score
Reviewing your credit score regularly (and for free) is one of the best things you can do as a responsible credit card user. Period.
However, the myth that checking your credit hurts your score pervades, in part, because of the confusing language that’s used to notate when your credit file has been accessed. Whenever your credit report is requested, you’ll receive an ‘inquiry’. However, it’s important to note that there’s a big distinction between ‘soft’ and ‘hard’ inquiries.
When you request your own credit report, this qualifies as a soft inquiry. Soft inquiries have no effect on your credit score whatsoever. That means that checking your own credit report will not hurt your credit score. It’s that simple.
However, when you apply for a new loan or other type of credit, the prospective creditor will access your credit file to assess your creditworthiness. This will result in a hard inquiry, which will, in fact, have a negative impact on your credit score. Hard inquiries will remain on your credit file for two years, although they will only affect your score for 12 months.
If you’d like to check your credit report, you can do it here for free. By law, each of the three major credit bureaus must give you free access to your credit report once per year. I try to check a credit report from a different bureau every three to four months to check for inaccuracies or fraud. In fact, I just requested my credit report while writing this article and it took all of 90 seconds. You should do the same.
Bonus: If you are serious about protecting your credit you should also freeze your credit files for free.
Myth 3: You Can Pay Someone To Fix Your Credit Score
If you have a history of making late payments and don’t practice sound credit management, there’s no magic switch you can flip in order to have accurate information removed from your credit report on-demand.
While there are a lot of credit repair services roaming the web and social media, the fact is that they don’t do anything that you can’t do on your own.
The best way to repair your credit is to practice good credit management strategies. This means paying your cards and other credit accounts on time, every time. It also means understanding how credit scores work and what the components that go into your score are.
The components of your credit score are as follows:
- Your payment history comprises 35% of your credit score
- Amount of debt (credit utilization) comprises 30%
- Length of credit history comprises 15%
- Amount of new credit (and inquiries) comprises 10%
- Your credit mix comprises the final 10% of your credit score
This means that 50% of your score (payment history and length of credit history) is related to time. Clearly, to meaningfully improve your score it will take patience.
If you’re getting ready to apply for a mortgage, or if you are hoping to lower your student loan interest rates by refinancing, here’s what you can do to give your score a boost more quickly. Thirty percent of your score is based on your credit utilization, which is essentially based on a current snapshot of your accounts. While it could take years for negative marks to roll off of your credit report, you can quickly lower your credit utilization.
Your credit utilization is determined by taking your outstanding balance on your revolving credit accounts and dividing it by the total credit available to you. It could take several weeks for the updated information to be passed from your creditor to the credit bureaus, but it’s a fast way to improve an important metric. For the highest credit scores, aim to lower your utilization below 10%.
Don’t lose sight of the fact that it can take time to improve your credit score. Start to establish healthy credit habits today so that your score reflects them in the future. But most importantly, don’t despair if your credit isn’t perfect.
Regardless of what your credit score is, it’s important to know that your credit score might not be as important as you think it is.