Having a firm grasp on the definition of credit, how it affects your financial well-being, and how to get and maintain a healthy credit score is a topic that is discussed in many circles this time of year as many people resolve to be better stewards of their finances. There is tons of information on the topic floating around the interwebs from various sources, and while for the most part you can trust the information you're reading, there are some credit myths that you should be aware of.
1. Having some credit card debt will help build my credit history and improve my score.
False. Having credit card activity and a positive, on-time payment history could help build your credit history and score, however, carrying a balance will only cost you money in interest charges. Likewise, the higher your balance, the more likely it is that your score will be impacted for the worse, as your credit card utilization rate (how much you owe on your credit cards compared to what your credit limit is) affects 30% of your score.
2. My age will affect my credit score.
False. Your credit report does not include any demographic information, so your age, gender, marital status, race, or ethnicity isn't documented on any report.
Related reading: Get Out of Debt in 5 Simple Steps
3. My FICO score is the only score creditors use when determining if/how much they will lend to me.
False. There are multiple different score models that a lender can choose from when determining your credit score. FICO is merely a brand, much like Nike or Disney or Advil. The key takeaway here is that you probably shouldn't concern yourself as much with the digital score as with the grade—very bad, bad, good, very good, excellent—as these tend to be more accurate from score model to score model.
If you have a few hours to kill and really want to get into the knitty-gritty, the CFPB published an analysis on the difference between the scores purchased by consumers and creditors.
4. Checking my credit report will cause my score to go down.
False. When you check your own credit score, it is considered a soft inquiry, and unlike hard inquiries, it does not affect your credit rating. It's a good idea to stay on top of your credit, so at a minimum, you should consider checking your credit report once a year to ensure everything is accurate. According to the Insurance Information Institute, in 2014, there was an identity-fraud victim every two seconds (Tweet this stat!), so a regular review of your credit report is critical.
5. Late payments aren't that big of a deal.
False, false, false! Your payment history accounts for 35% of your credit score. It is the highest determining factor that credit agencies use in their scoring models, and even one late or missed payment can significantly impact your score. In addition, if you do carry a balance on your credit cards, making a late payment could cause your credit card company to increase your APR%, costing you more money in interest charges.
Your credit score affects many aspects of your finances, including whether or not you can get financing for a vehicle or home, and if you can, what your interest rates will be. Therefore, it is vital that you take proactive steps to get and maintain a healthy credit score.