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3 Credit Myths You Should Know That could hurt your credit score

A NerdWallet survey finds that Americans aren’t aware of the basics of credit, which could affect their credit scores.

By Erin El Issa Senior Writer | Personal finance, analysis of data, credit card Erin El Issa writes data-driven research on personal finances, credit cards travel, investing, banking and student loans. She is fascinated by numbers and strives to make data sets understandable to help consumers improve their finances. Before becoming a Nerd during 2014, she worked as an accountant for tax purposes and freelance personal finance writer. Erin’s writing has been featured by The New York Times, CNBC as well as on the “Today” show, Forbes and elsewhere. In her spare moment, Erin reads voraciously and tries in vain to keep on top of her two children. She is based in Ypsilanti, Michigan.

October 4 2022

Edited by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years working at The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Previous experience included editing copy and news for various Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s in mass communications and journalism from Iowa’s University of Iowa.

The majority or all of the products featured here are from our partners who compensate us. This impacts the types of products we write about and where and how the product is displayed on the page. But this doesn’t affect our opinions. Our views are entirely ours. Here is a list of and .

Financial misinformation is rampant, and it could be damaging your credit score. It is found that Americans hold many misconceptions about their credit, some of which could seriously damage their scores. Three common credit score myths and ways to ward off them.

Myth 1. A open balance with your credit card good for your credit score

This is a sticky credit myth The majority of Americans (46 percent) think leaving the account balance is more beneficial for their credit scores than paying the balance in complete, according to the study. But carrying a balance doesn’t help your credit and can actually be detrimental in the event that the balance is more than the credit limit you have available. It’s because it raises your credit utilization (the quantity of the credit limit you use), which significantly influences your score.

Another drawback of leaving a balance on your credit card lies in the cost of interest. Credit card debt — which you have in the event that you make a mistake and leave a balance on your card regardless of whether you intend to do so- is one of the most expensive types of debt because of the two-digit interest rates. While you may believe that leaving a modest balance on your account wouldn’t be that costly, it can be due to .

If you do not pay off your entire balance by deadline, interest is calculated, but not only on the balance that remains. In fact, interest is calculated on an average day-to-day balance of your credit card. So if you leave an account with a balance of $10 on your credit card, but the average daily balance on your card over the course of the month was $1,000, the interest is charged on the $1,000 balance.

You can combat this by paying your balance by or before the due date. This can reduce the credit utilization of your account and monthly costs.

Myth 2. Closing a credit line you don’t use is good for your credit

The study revealed that close to 50% of Americans (46%) believe that the closing of a credit line they do not use will help improve their score on credit. The idea of keeping a financial product you don’t use isn’t logical however closing a credit card could damage your score.

The closing of a credit card could hurt your credit score, by increasing the amount of credit you use. While there are a few reasons to , generally, disuse isn’t enough of a reason to take the credit hit.

Even if you don’t cancel any credit cards, your company will eventually close any account that isn’t being used over a certain period. To avoid this issue, you can add an occasional fee -for example, a monthly subscription — to the card and create autopay to wipe off the balance of your credit card every month.

Myth 3. A credit report won’t affect your score

More than a quarter of Americans (28%) do not realize that a lender running an inquiry on their credit can cause their credit score go down According to the study. There are two kinds of credit checks: a hard inquiry and a soft inquiry. If you conduct a credit check, it’s a soft inquiry and won’t affect your score. But when a lender checks your score to determine creditworthiness for a loan, it’s a , and your score could decrease.

There are some exceptions. For instance, for some financial instruments, such as a mortgage or auto loan the number of inquiries that are made within a short time frame can be considered one hard inquiry. The length of time for each inquiry varies by credit scoring models, however it’s best to make all requests within two weeks. This is referred to as “rate shopping” and permits you to look around to get the best loan conditions.

However, applying for more than one credit card in a short period doesn’t fall under rate shopping and could lead to an inquiry that is hard for each application. This is why limiting the number of card applications you file is a good option. Hard inquiries could remain on your credit report for two years. Therefore, before you apply for an additional credit card, ensure that you’re within your credit score range.

The author’s bio: Erin El Issa is an expert in credit cards and studies writer at NerdWallet. The work she has written for NerdWallet was featured on USA Today, U.S. News and MarketWatch.

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