Expert Insight: This article was written by David Chen, a financial analyst with 15 years of experience in consumer credit and lending. David has helped thousands of clients understand and improve their credit score (FICO score factors)s through evidence-based strategies.
Your credit score is one of the most important numbers in your financial life, yet it's surrounded by more myths and misconceptions than perhaps any other aspect of personal finance. These misunderstandings can cost you money, prevent you from accessing credit when you need it, and keep you from reaching your financial goals. Let's separate fact from fiction and reveal the truth about what really affects your credit score.
The Importance of Understanding Your Credit Score
Before we dive into the myths, it's worth understanding why your credit score matters so much. This three-digit number, typically ranging from 300 to 850, influences whether you'll be approved for loans, what interest rates you'll pay, and even whether landlords will rent to you or employers will hire you. A difference of just 50 points can mean thousands of dollars in additional interest over the life of a mortgage or auto loan.
The problem is that credit scoring is complex, and this complexity breeds misconceptions. Many people operate on outdated information or advice that was never true to begin with. Let's tackle the five most persistent and damaging credit score myths.
Myth 1: Checking Your Credit Score Hurts It
This is perhaps the most widespread credit myth, and it keeps many people from monitoring their credit—which is exactly what they should be doing. The confusion stems from a misunderstanding about credit inquiries.
There are two types of credit inquiries: soft inquiries and hard inquiries. When you check your own credit score or when a company checks your credit for a pre-approval offer, this is a soft inquiry. Soft inquiries have zero impact on your credit score. You could check your credit every single day and it wouldn't hurt your score at all.
Hard inquiries occur when you apply for credit—like a credit card, mortgage, or auto loan. These can temporarily lower your score by a few points, typically less than five points, and the impact diminishes over time. Even then, credit scoring models are designed to recognize when you're rate shopping. Multiple hard inquiries for the same type of loan (like a mortgage or auto loan) within a 14-45 day window are typically counted as a single inquiry.
The truth is that regularly monitoring your credit is one of the best financial habits you can develop. It helps you catch errors, spot signs of identity theft early, and understand what factors are helping or hurting your score. You can check your credit reports for free once a year from each of the three major credit bureaus at AnnualCreditReport.com (Federal Trade Commission), and many credit card companies and financial services now offer free credit score monitoring.
Myth 2: Closing Credit Cards Improves Your Score
Many people believe that closing unused credit cards will help their credit score, reasoning that fewer accounts means less risk. This logic seems sound, but it's backwards. In most cases, closing credit cards actually hurts your credit score, sometimes significantly.
Here's why: Your credit utilization ratio—the amount of credit you're using compared to your total available credit—makes up about 30% of your FICO score. When you close a credit card, you reduce your total available credit. If you're carrying balances on other cards, this means your credit utilization ratio increases, which can lower your score.
For example, imagine you have three credit cards with a combined credit limit of $15,000, and you're currently carrying $3,000 in total balances. Your utilization ratio is 20% ($3,000 ÷ $15,000). Now suppose you close one card with a $5,000 limit. Your available credit drops to $10,000, but you still have $3,000 in balances. Your utilization ratio jumps to 30%, and anything above 30% starts to negatively impact your score.
Additionally, closing your oldest credit card can hurt the length of your credit history, which accounts for 15% of your score. Length of credit history considers both the age of your oldest account and the average age of all your accounts.
That said, there are situations where closing a card makes sense: if it has a high annual fee you can't justify, if you're struggling with spending control, or if you're worried about fraud on an account you never use. In these cases, the non-credit benefits may outweigh the score impact. But don't close cards simply because you think it will help your score—it usually won't.
Myth 3: You Need to Carry a Balance to Build Credit
This myth is not only false but potentially expensive. Some people believe that carrying a small balance month to month and paying interest shows lenders that you're a responsible borrower. This is completely untrue and costs people money in unnecessary interest charges every single month.
Credit card companies report your balance to credit bureaus typically once a month, usually on your statement closing date. What matters for your credit score is that you have an active account with a reported balance, not that you carry that balance past the due date and pay interest on it.
The optimal strategy is to use your credit cards regularly for purchases you would make anyway, then pay the statement balance in full every month before the due date. This way, you build a positive payment history, maintain an active account, keep your utilization low, and pay zero interest. You get all the credit-building benefits without any of the costs.
Payment history is the single most important factor in your credit score, accounting for 35% of your FICO score. What builds a positive payment history is making on-time payments every month—not carrying a balance or paying interest. In fact, carrying high balances can hurt your score due to increased credit utilization.
If you've been carrying balances and paying interest because you thought it would help your credit score, stop immediately. Pay off your balances, and then pay in full each month going forward. Your credit score will improve, and you'll save money on interest.
Myth 4: Your Income Affects Your Credit Score
It seems logical that your income would factor into your credit score—after all, isn't your ability to repay debt related to how much money you make? While this logic makes intuitive sense, credit scores don't work this way.
Credit bureaus don't collect or track your income information. Your credit report contains information about your credit accounts—how much you owe, your payment history, how long you've had credit, what types of credit you have, and recent credit inquiries. It doesn't include your income, assets, employment status, or bank account balances.
What this means is that someone earning $30,000 a year and someone earning $300,000 a year could have identical credit scores if they manage their credit the same way. The wealthy person doesn't automatically have a better score, and the modest earner isn't penalized for their income level.
Now, this doesn't mean income is irrelevant to lending. When you apply for credit, lenders will ask about your income and consider it when making their decision. Someone with a higher income might qualify for a larger loan or better terms because they have more capacity to repay. But this is a lending decision, separate from your credit score itself.
This is actually good news if you're earlier in your career or have a modest income. You can build an excellent credit score regardless of how much you earn. What matters is how responsibly you manage the credit you have: paying on time, keeping balances low, and maintaining accounts over time.
Myth 5: Paying Off Collections Removes Them from Your Report
Many people believe that once they pay off a collection account, it will be removed from their credit report and their score will immediately improve. Unfortunately, the reality is more complicated.
When an account goes to collections, that collection account can remain on your credit report for seven years from the date of your original delinquency—regardless of whether you pay it off. Paying the collection is important and the right thing to do, but it doesn't erase the history of the account being in collections.
That said, newer credit scoring models (FICO 9, VantageScore 3.0 and 4.0) do give less weight to paid collection accounts than unpaid ones. Some ignore paid collections entirely. However, many lenders still use older scoring models that count paid and unpaid collections similarly.
The impact of a collection account on your score also diminishes over time. A five-year-old collection hurts your score less than a recent one. As the account ages and you add positive payment history with other accounts, your score will gradually improve even if the collection remains on your report.
If you have a collection account, your best strategy is to pay it off (or settle it if you can negotiate a lower amount), then focus on building positive credit history going forward. Some collection agencies will agree to "pay for delete," meaning they'll remove the collection from your credit report if you pay. This isn't guaranteed and isn't supposed to happen according to credit bureau policies, but it's worth asking.
Also be aware that paying an old collection can sometimes cause your score to drop temporarily because it updates the "last activity" date on the account, making it appear more recent. This is a short-term effect, and having the account marked as paid is generally better for future credit applications.
The Truth About Building Good Credit
Now that we've debunked these myths, what actually works for building and maintaining a strong credit score?
Focus on payment history: Make all payments on time, every time. This single factor has the biggest impact on your score. Set up autopay if you're worried about missing due dates.
Keep credit utilization low: Try to keep your credit card balances below 30% of your credit limits, and ideally below 10%. This shows lenders you're not overly reliant on credit.
Maintain old accounts: Keep your oldest credit cards open and use them occasionally, even if just for small purchases you pay off immediately. Length of credit history matters.
Have a mix of credit types: Credit scoring models like to see that you can handle different types of credit: revolving accounts (credit cards) and installment loans (car loans, personal loans). Don't take on debt just for this purpose, but having a mix helps if it happens naturally.
Limit new credit applications: Each hard inquiry can temporarily lower your score. Only apply for credit when you really need it, and try to bunch similar applications (like mortgage shopping) into a short time period.
Monitor your credit regularly: Check your credit reports and scores regularly to catch errors and identity theft early. Remember, checking your own credit doesn't hurt your score.
Moving Forward With Confidence
Understanding how credit scores really work empowers you to make better financial decisions. Don't let these common myths hold you back from monitoring your credit, maintaining your accounts, or building the strong credit history you need for your financial future.
Your credit score isn't a mysterious black box—it's a number based on your credit behavior over time. By focusing on the factors that actually matter and ignoring the myths that don't, you can build and maintain excellent credit regardless of your income level or where you're starting from today.
If you're working on improving your credit and need access to emergency funds, remember that options like installment loans report to credit bureaus and can help build positive payment history when managed responsibly. Whatever your credit situation, understanding the truth about credit scoring is your first step toward financial empowerment.