(NerdWallet) – Financial misinformation is rampant and could harm your credit score. A New NerdWallet Survey finds that Americans have many misconceptions about their credit, some of which could seriously hurt their scores. Here are three common credit rating myths and how to guard against them.
Myth 1. Leaving a balance on your credit card is good for your score
It’s a persistent credit myth: Nearly half of Americans (46%) believe leaving a balance on their credit card is better for their score than paying it off in full, according to the survey. But having a balance doesn’t help your credit and can, in fact, be detrimental if the balance is a large percentage of your available credit limit. In effect, this increases your credit utilization (the amount of your credit limit used), which greatly influences your score.
Another disadvantage of leaving a balance on your credit card is the interest charge. Credit card debt – which you have if you leave a balance on your card, even intentionally – is one of the costliest types of debt due to double-digit interest rates. And while you might think leaving a small balance on your card wouldn’t cost that much, it may be due to how credit card interest is calculated.
If you don’t pay your balance in full by the due date, interest is calculated, but not just on the remaining balance. Instead, it’s calculated on your average daily credit card balance. So if you leave a balance of $10 on your credit card, but the average daily balance on your card during the month was $1,000, interest is charged on the $1,000 balance.
You can combat this by paying off your balance on or before the due date, which can lower your credit usage and monthly costs.
Myth 2. Closing a credit card you’re not using is good for your credit
The survey found that nearly half of Americans (46%) think closing a credit card they no longer use can improve their credit score. Keeping a financial product you don’t use seems counterintuitive, but closing a credit card can hurt your score.
Closing a card can affect your credit score in two ways: by increasing your credit usage and by decreasing the average age of your accounts. And although there are reasons to close a credit card accountgenerally, obsolescence is not a sufficient reason to cash in the credit.
Even if you don’t cancel your credit card, the issuer will eventually close any account that hasn’t been used for a certain period of time. To combat this, you can charge a small recurring expense — like a monthly subscription — to the card and set up autopay to clear the credit card balance each month.
Myth 3. A credit check will not affect your score
More than a quarter of Americans (28%) don’t realize that a lender performing a credit check can lower their credit score, according to the survey. There are two types of credit checks, a thorough inquiry and a soft inquiry. When you check your credit, it is a gentle inquiry and does not affect your score. But when a lender checks your score to determine the creditworthiness of a financial product, it’s a difficult investigationand your score may drop.
There are a few exceptions. For example, for certain financial products, such as a mortgage or a car loan, several requests made over a short period of time count as one serious request. The time frame varies by credit score model, but it’s safest to submit all applications within two weeks. This is called “rate shopping” and allows you to shop around to find the most favorable loan terms.
However, applying for multiple credit cards in a short period of time does not fall under rate shopping and will result in a thorough investigation for each application. For this reason, limiting the number of card applications you submit is a good idea. Serious inquiries can stay on your credit report for two years, so before applying for a new credit card, make sure it’s available to consumers in your credit score range.
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