The Myth That Could Wreck More Than Half of Americans' Credit Scores
So you know credit score matters, but do you know which myth does the most damage to yours?
It turns out a little knowledge can be a dangerous thing. Having a good credit score is important — you can save thousands in interest if you are considered a very good or excellent risk. But not everyone understands what goes into your credit score and how to improve it and keep it high. You could be costing yourself a lot of real money with habits that might be damaging your score.
In fact, over half of Americans are wrong about one simple fact about credit scores. Here's what you need to know.
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The Myth: You Should Carry a Balance
Over half of the people who responded to a recent survey by U.S. News Money thought you should carry a balance on your credit cards. Respondents said that "using your credit" would boost your score, but this is false.
While it's true that your payment history is a factor, there's no need to carry a balance on your credit cards.
What Goes Into Your Credit Score
According to Fidelity, FICO — which is one of two primary credit score formulas — looks at five factors to arrive at your credit score, weighing each according to its importance.
Payment History (35%)
This looks at whether you've paid your bills on time. This includes all your bills, including your mortgage, auto loans, student loans and credit cards. Paying off bills in a timely fashion will show a strong history compared to carrying a balance. (Not to mention all the fees and interests you're incurring unnecessarily.)
Outstanding Balances (30%)
This includes how much you owe on all the accounts you have and rewards how much available credit you have that you're not using. If you have a credit card with a $10,000 limit that has a zero balance, that's $10,000 of available credit that will be factored in here. This, along with payment history, is the biggest proof of why there's no value in carrying a balance. Your score goes up the bigger the difference between total available credit and utilized credit.
Length of Credit History (15%)
Having accounts for a long period of time will improve your score. If you no longer need an account, consider keeping it open but just not using it if you want to improve this factor.
Credit Mix (10%)
Lenders want to see a mix of revolving credit, like credit cards and installment credit, like auto loans and mortgages.
New Credit (10%)
Opening a new account can cause your score to drop a little, but it's usually temporary. If you open several new accounts in a short period of time, however, your score may drop and stay low as that could indicate you're under pressure financially.
If you don't keep a balance on your credit cards, that will help your payment history and outstanding balance scores, which combine to make up the majority of your total score. So, go ahead and pay off those cards every month and watch your credit score go up.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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