Almost everyone gets a credit card at some point in their lives. According to the Financial Consumer Agency of Canada, 93% of Canadians over the age of 18 have a credit card.
Many people might think they have the knowledge they need to keep good credit health. But since credit is something that isn’t widely taught in schools, most people’s credit knowledge is lacking. People may not realize the importance of their credit health until they apply for something, like a mortgage or line of credit, where a credit check is required to qualify.
Even though it’s vital to have credit knowledge and understand how credit scores work, there are many myths around the topic that tend to confuse people. Many of these myths may actually be causing a lot of harm to your credit health. This article will debunk common credit myths, and replace them with facts so you can better understand how credit actually works.
1. Myth: Checking your credit score will lower it
One of the most common credit myths is that if you check your credit score, your score will take a hit. This myth causes people to avoid checking up on their credit health. In fact, 59% of people self-reported their credit scores as being ‘very good,’ but those who reported themselves as above average were less likely to have actually checked their credit score. If you don’t know what your credit score is, how can you take proactive steps to improve it?
The truth: Checking your credit score is encouraged and will not damage your score.
Your credit score is a three-digit number that is based on your current credit behaviour and history. Your credit report is a statement detailing your credit history but doesn’t include your credit score. When you check your own credit score or report, it’s called a soft inquiry, which is a high-level overview of your credit history. Soft inquiries may also be done by others, such as a potential employer or landlord. You can soft check your credit as frequently as you like without affecting your score.
Checking your credit score or credit report is something that you should actually be doing regularly. It is recommended that you check it at least once a year. By checking, you will not only be able to understand whether it needs to be improved, but you will also be able to catch if there are any inaccuracies in your report and get them fixed. According to Envision Financial, nearly half of Canadians don’t even know where they can check their credit. Checking your credit score is easy and can be free. You may be able to even find it right on your online banking.
There is a type of credit check that can cause your credit score to take a hit, and those are called hard inquiries. Hard inquiries happen when you are applying for credit or a loan, and the lender has to do a credit check to see if you are eligible to borrow. These types of checks should only be done when necessary, and not too frequently.
2. Myth: All debt is equal
Another common misconception is that debt is debt, and all debt will negatively impact your credit health. Some people believe that whether the debt is a student loan, a mortgage, or a late bill payment sent to collections, they will all hurt their credit score.
The truth: It’s really about how you behave with your debt.
The most important factor in measuring a credit score is your payment history. So when you borrow money, it will likely have a minor impact on your credit score until you prove that you are paying it back responsibly and on time. Avoiding debt or getting a credit card is not good for your credit health because there won’t be any repayment history to determine how you’d behave with debt when you do apply to borrow. Also, having a lot of debt could cause a negative impact. For instance, if you have a credit card and have used most of the available credit while only making minimum payments, this will affect your credit utilization rate, which is also used to measure your credit score.
3. Myth: Your income and job impact your credit score
A common misconception about credit scores is that you need to be rich in order to have a great credit score. But that is far from the truth. There are many people making minimum wage who have great credit. There are also people making a six-figure salary who have poor credit scores.
The truth: Your job and salary have no direct impact on the health of your credit score.
It all depends on how you behave with the income you get from your job. You need to make at least the minimum payments on time, and not utilize too much credit in order to keep your score from taking a hit. People who make more money also tend to have lifestyles that cost more. So even though they have more income, their bills are likely going to also have higher payments. So it is just as easy for someone with a high income to overspend and miss payments as it is for someone with a lower income.
4. Myth: Closing credit accounts will boost your credit score
You might think that once you pay off all debt on a credit card or line of credit, then it’s safe to close the account so you won’t be in debt again. You might even close an account, and then eventually open a new one. But this can hurt your credit score, at least temporarily.
The truth: Closing a credit card can increase your utilization rate and affect your credit score.
When calculating a credit score, one of the top factors credit bureaus look at is the utilization rate. If you close a credit card, you will lose the credit limit amount that is used to calculate your utilization rate. As a result, your utilization rate will increase and could negatively impact your credit score. Another thing bureaus use to calculate your credit score is the age of the credit account. Older credit cards that are in good standing, used regularly, and paid off every month are better than not having any open credit accounts, or opening a new one. So even though you’ve finally paid off your full balance, sometimes it's best to leave the credit card open and use it responsibly.
5. Myth: Once you have bad credit, it’s impossible to recover
Some people think that once you have a bad credit score, there is no return, and they’ll often give up trying to improve it. This is a very dangerous belief because it'll result in them continuing the behaviours that got them bad credit health in the first place, making things worse.
The truth: With the right steps, you can improve your credit health.
Bad credit health can be improved. It won’t happen overnight, and you might not even make it from “poor” credit to “good” credit within a year. But you can make adjustments to consistently improve your score, little by little.
These are just a few of the most common credit score myths debunked. It’s always a good idea to make sure to do your research and ask questions when doing any type of borrowing, so you can take the right steps to be on your way to better financial health. Want to learn more about how you can ensure good credit health? Watch our on-demand webinar: Financial Capability Series: Credit.
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.