Don’t Fall for These Credit-Building Myths
If you’re concerned about how to build credit, don’t fall for these myths for improving your credit score. It’s possible to achieve a good credit score, but don’t waste your time focusing on the wrong things. If you can establish a good track record of consistent payments, along with a diverse mix of the types of credit you have, you can build up a good credit score.
Myth #1: Removing Old Inquiries
Every time you apply for a loan, creditors pull your credit report with a “hard” inquiry. This causes your score to go down because it shows you want more credit and more risk. Other inquiries, like offers you receive in the mail or from potential employers, are considered “soft.” You may have heard that if you have more soft inquiries, it can bump the hard inquiries off, but don’t spend time trying to generate more soft inquiries because this is not a major factor in your credit score.
Myth #2: Closing Old Accounts
Although it seems like closing accounts will help improve your score, it won’t, and it could actually hurt it. Why? Because it could shorten your credit history and reflect a smaller amount of available credit, neither of which helps your cause. You want your credit history to be long, and your utilization rate, or how much available credit you’re using, low.
Myth #3: Opting Out of Credit Card Offers
It’s fine to opt out of credit card offers if you’re simply sick of junk mail, but don’t do it with the idea that it will help raise your credit score. These are soft inquiries that don’t affect your credit rating, so it’s not going to make an impact whether you get them or not.
Myth #4: Opening Up Lots of Accounts
This one’s a biggie: don’t fall into the trap of opening lots of accounts to prove that you have good credit. Lenders look at that as a red flag for risk, thanks to all the hard inquiries. These inquiries will lower your credit score, and make lenders wary of lending to you.
Myth #5: Paying off Delinquencies
While paying off old debt is a good thing, delinquencies like late payments, charge-offs, collection accounts, tax liens, and judgments will stay on your credit report for seven years, no matter what. Chapter 13 bankruptcies will stay on your credit report for seven to 10 years, and Chapter 7 bankruptcies will remain for 10 years.
Myth #6: Paying off Loans Early
Believe it or not, an open credit account that’s in good standing boosts your credit score more than a paid-in-full, closed account. That’s because it shows current, consistent payment behavior, while a closed account reflects past behavior and doesn’t necessarily predict future risk.
Myth #7: Making Payments Before the Due Date
Your credit score is all about your utilization rate, and making payments early doesn’t impact that. However, paying your credit card balance in full ahead of the statement closing date will post a zero balance for that account and help your utilization rate and credit score.