Last week, we revealed the top two myths that are associated with building your credit and improving your score. Now, we’ve debunked two additional myths, as they can do more harm than good when trying to rebuild and maintain good credit.
Myth: Checking your credit report will negatively affect your score
This myth comes from confusing two different types of credit score inquiries: hard inquiries and soft inquiries.
Hard inquiries are made by lenders or credit card companies when you apply for a new line of credit—a loan, a new credit card or a mortgage, for example.
Soft inquiries are made by you or by others for background check purposes (a potential employer or landlord, for example).
Hard inquiries suggest you might be taking on more credit soon, so they usually lower your score by a few points. Soft inquiries, on the other hand, do not affect your credit score in any way. This means you have nothing to lose by accessing your own score—in fact, doing so will help you understand what your current credit activity looks like and how you can improve it.
There are some instances, like renting a car or a landlord running a credit check, where either a hard inquiry or a soft inquiry can be made. In these cases, it’s a good idea to find out beforehand what kind of inquiry will be made so that you know what to expect.
Myth: Opening or closing a bunch of credit cards will improve your score
Even though these actions are the complete opposite of each other, this myth is still widespread—and very misleading. Opening and closing credit cards affects several different aspects of your credit score.
Opening new credit cards gives you more available credit, which in turn lowers your credit utilization ratio. This is a fancy term for the amount of available credit you actually use each month. Lowering your credit utilization ratio is a good thing, so opening new credit cards to boost your score might seem like a solid strategy. But remember those pesky hard inquiries? Opening a bunch of new credit cards means a sudden increase in the number of hard inquiries. Each hard inquiry docks a few points from your score, and if many are made within a short amount of time, it makes you look risky, which can further impact your credit score in a negative way.
So, you’re probably thinking that closing a bunch of accounts must be the way to go, right? Not quite. Depending on the accounts you close, you could unintentionally be raising your credit utilization ratio and shortening the overall length of your credit history. Both of these consequences lower your credit score.
The best approach is to space out any credit account openings or closings. Try to time them in a way that any short-term negative impact on your credit score won’t interfere with an important upcoming car loan or mortgage.
Do your research, only apply for credit products you need, and understand what a specific credit card is contributing to your score before making the decision to close it. A good example of this is your first credit card that may have a low limit and no rewards, but if it’s adding a few years on to your credit history, it’s best to keep it in rotation.