Today’s post is going to tackle a variety of money myths that I’ve heard over the years, and especially the ones with a tricky answer. If you’ve ever wondered how often is too often to check your credit score, or whether to close an old account you aren’t using, you can find the answers below as well as an explanation for why you might want to think twice before cutting up that credit card.
Money Myth #1: Checking your credit score too often negatively affects your credit
The simple answer here is FALSE – you can check your credit score as often as you like without worry, as long as it’s a “soft” inquiry. A soft inquiry would be checking your score on Credit Karma or getting your free annual credit report – there are several means available to you, and these are always available, worry free.
This myth stems from the fact that running a “hard” inquiry does indeed affect your credit score negatively, but the difference here is that a hard inquiry is usually only required when you are applying for credit. If you’re applying for a car loan, buying a house, renting an apartment, or getting a new credit card, the lender will almost always run a hard inquiry to get your credit score and report, to determine if you are a responsible borrower and what kind of rates they will extend to you.
Each time you apply for credit, a record of that hard inquiry follows you around for 2 years, so be conscious of when and how often you are racking these up – you can easily check on most credit apps and this information is in your report as well. As long as you are only checking your credit for informational purposes rather than applying for new credit, check away! You’re not hurting your score, and most likely will learn a lot, so I encourage anyone to check it as often as possible to have a better idea of where they stand.
Money Myth #2: Ideally, you should pay off your credit card in full each month
This one might surprise some of you, but in fact paying off your credit card(s) in full each month can actually hurt your credit. One of the biggest factors affecting your credit score is called your “credit utilization ratio”, which essentially refers to the amount of credit you are “using”, compared to the amount extended to you.
Let’s say you have a credit card with a $10,000 limit, and you have $2,000 on the card to pay off. Your utilization ratio would be $2,000 out of $10,000, or 20%. The ideal utilization is below 10%, so let’s say you pay your card down to $500 – now your ratio is at 5%, which is excellent. Now let’s say you pay it off entirely – whoops, now it’s $0 out of $10,000, and what is zero divided by anything? ZERO. Now you’re showing the credit bureau that you aren’t using any of your credit, which hurts your score – they want to see that you use credit responsibly, not that you don’t use it at all.
Depending on which day of the month your balance is reported, if you are paying your card off every month this could show up as a zero balance, effectively showing that you don’t use your credit at all. Personally, I recommend keeping a small balance on your card at all times, and setting up one bill to come out each month that you pay off.
Keep in mind that if you have multiple cards, the total of all your lines of credit is taken into consideration, so figure out where you want to keep each balance at and set it up so you don’t have to think about it. Boosting your credit score is about showing that you can handle debt responsibly, so in many cases no credit is just as bad as bad credit.
Money Myth #3: As long as I pay the minimum balance on my credit card, I’m alright
Many of you already know about the minimum payment trap, but this one is so crucial I wanted to touch on it here – if you are in credit card debt, and have absolutely any funds available to you whatsoever, use them to pay more than the minimum payment. Credit cards are set up to make money off of you, and the minimum payment they set is not an accident, but a careful calculation. If you have several thousand dollars in credit card debt, and they set your minimum payment at a nice low number, this is not to benefit you – it means they are collecting interest on all the rest of that money for an extended period of time.
By paying only the minimum, you allow the bank to cash in on the interest on the remainder of your balance. It’s easy to view our credit cards as “free money”, but many of them have interest rates upwards of 15-20% nowadays, and you’re paying that interest while your balance remains. The minimum payment lures you into thinking you’re responsibly paying another bill, when in reality they’re making tons of money off your remaining balance, and stretching out the time they can do this by giving you a low monthly payment.
If you still aren’t convinced, look at your balance, your minimum payment, and your interest rate – will your minimum payment help you pay off your balance in the next year? The next 3 years? The next decade? If the answer is “no”, then set up a payment plan for yourself, and stick to it. The minimum payment trap is just that – a trap – so don’t let them fool you into thinking you’re getting out of debt while they cash in on you.
Money Myth #4: If I’m no longer using a credit card or bank account, I should close it
This one gets a little tricky, but my short answer here is FALSE – if you have accounts you aren’t using and they aren’t charging you anything, consider leaving them open (for now). An important factor in your credit score is the age of your credit history, which is the average age of all your accounts open. By closing older accounts and keeping newer ones, this reduces your average age, and lowers your score.
Another factor is the total number of accounts you have open – if you only have a handful of accounts, consider leaving them all open, at least until you have more accounts and a wider variety. Closing accounts reduces the total number of open accounts, thereby reducing your score. The only exception here is if you already have a sufficient number of accounts, and closing one isn’t going to hurt you much or at all.
The only instance where I would recommend absolutely closing an account is if you are paying exorbitant fees on it – if you got a store credit card that charges you an excessive yearly fee and you never use it, then get rid of it. Dropping a few points temporarily on your credit score is a fair exchange for not paying fees on something you aren’t using, so just be sure to do your homework before you make a decision either way.
If you found this post useful I’m hoping to make “myth busting” a regular thing, so feel free to submit your questions or comments to me. Thanks for reading!