Of course, there are more than five, but I find these five lies the most annoying. Some of them have been propagated by financial experts in order to protect the public (they don't believe people can think for themselves). Others have been spread by ignorance due to the clouds of secrecy surrounding credit-making decisions. Take a quick look and see if you can recognize some of these lies (and try to count how many times you have heard them as well).
1. You must carry a balance to raise your credit score.
I will not be surprised if future historian detectives will find out that this outrageously false claim had been conceived by clever banking marketers. This patently ridiculous lie is probably responsible for thousands, if not millions of people getting and staying in credit card debt. The truth is quite the opposite: while the FICO credit card scoring formula does not penalize borrowers who carry a balance, it does not give them extra points either. Thank God, or they would become the laughing stock of the industry!
2. Your credit gets dinged every time you check your own score.
How do you spell baloney? Fortunately, not many people believe this nonsense nowadays, but I have still had to bring it up.
3. Closing down some credit cards will improve your credit score.
This one is a little more complicated. But, in essence, it is a lie, as well. If you thoughtlessly close a credit card, that can increase your Utilization Rate and reduce the Average Age of Account. While AAoA is a secondary factor in your credit score, your Utilization Rate (debit to credit ratio) is one of the most important components of the FICO formula. Thus, closing a credit card might reduce your credit score, not improve it.
I will talk in details about Utilization Rate in future posts, because it is really important, but for now, let's say, if you do not need to close the card, you probably should not touch it.
4. You should never close down your credit card accounts.
I know, it might sound strange after what you have just read, but that is a lie, too. There are many reasons to close a credit card account. It might be that you do not want to pay that annual fee, or you might have trouble taking care of several credit cards at the same time. There is nothing wrong with respecting your boundaries.
There are ways, however, to reduce some of the negative effects. Some banks, like Chase, for example, usually allow you to transfer your credit line to another card from the same family before closing the account. It never hurts to ask.
5. Opening new credit cards will decrease your score
There is a little bit of truth in this lie, but it is still a lie. It is true that applying for a credit card will cause the bank to send a credit inquiry to one of the bureaus, or as they call it in the "biz", a "hard pull". However, hard pulls only dinge your score by 2-10 points, and these scratches will lose their effect in about 3-6 months. Unless you are applying for five or six credit cards at the same time... well, you probably aren't, so there is nothing to worry about, anyway.
In many cases, opening a new credit card account might actually help your score. Getting a new credit line will increase your Utilization Rate, which might not only mitigate but completely turn around the hard pull effect. Since everyone's credit file is different, it won't happen for everyone, but it will for many people.
Next post: How to improve your Utilization Rate like a pro!
This is a post by Andy Shuman, a credit and travel expert who blogs at www.Lazytravelers.net. He writes and blogs during and between trips that he enjoys free of charge mostly due to creative use of credit card offers. He believes that credit cards are much more than just a convenient way to pay for a purchase, and that the benefits of responsible credit habits can go far beyond getting the best rates for loans and mortgages.
Andy is the author of bestselling books from Lazy Traveler Handbook Series available on Amazon. When he's not traveling, he lives with his beautiful wife and daughter in Brooklyn, NY.
Questions? Suggestions? Keep them coming!
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