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5 Common Credit Myths That are Hurting Your Credit
Credit is one of the most necessary aspects of financial success, and yet it is also one of the most poorly understood. A variety of myths surround the use of credit, and some of them can result in severe consequences for your credit history and score. Learn to spot these credit myths so you can make sound decisions as a credit consumer.
No Credit is Better than Low Credit
From buying a car to getting your first apartment, there are a variety of situations in which a lack of credit can actually be worse than low credit. Begin building your credit through prepaid credit cards, being added on to an existing credit user's account or applying for low-limit cards and making timely payments.
Always Keep a Balance
The old myth that you should always keep a balance on your credit accounts is simply false. Paying off your credit balance in full is the only way to avoid the accumulation of interest. Keeping a balance neither improves nor harms your credit score. Making regular, timely payments and keeping a low balance is the only guaranteed way to boost your credit rating.
Having More than One Card Will Hurt Your Score
It is perfectly acceptable to hold more than one credit account. The issue arises when you have many different cards, each carrying a high balance. Opening a new credit account typically only results in a five-point hit to your credit score, which is not typically enough to make a difference in any major credit decision. In fact, many credit users choose to open a lower interest account for the purpose of transferring an existing balance to spread out their use of credit.
Refuse Credit Line Increases
While it may seem like common sense to avoid the temptation to spend that comes with accepting a higher credit limit, credit line increases can help boost your score if used wisely. The percentage of credit used is a significant percentage of your FICO score, so it makes sense to reduce the ratio of debt to credit wherever possible. Accepting an increase of your credit limit while maintaining your current spending patterns is a sensible way to improve your credit without maxing out your accounts.
Inquiries Always Damage Your Credit
While applying for new lines of credit does take a toll on your credit score, many inquiries, such as those issued by automobile insurance companies and rental agencies, do not have a significant impact. These inquiries are known as soft inquiries and they are standard in the world of credit. However, you should be careful of applying to too many new credit accounts at once. Not only is this risky financial behavior, but it can send up a red flag to any person or organization who issues a credit check.
Learning to spot financial myths begins with understanding their origins. Now that you know the origins of these common credit myths, you can make more informed decisions as a credit consumer.