Credit Score Myths That Cost American Families Real Money

This myth likely grew from a misunderstanding of how credit utilization works. Lenders do want to see that you use credit, but scoring models look at your statement balance relative to your credit limit. Any balance above zero at statement close raises your utilization ratio. Carrying a $200 balance on a $1,000 card costs you interest and produces a 20% utilization reading, which is worse than a $0 balance for many consumers. There is no scoring benefit to paying interest.

When you close a card, your total available credit drops immediately, which raises your overall utilization ratio. If the closed card is one of your oldest accounts, it also shortens your average account age over time, affecting the length-of-credit-history category. A card with no annual fee that you rarely use is often better left open with a small recurring charge paid in full each month, unless keeping it active creates a spending temptation that outweighs the credit benefit.

Credit inquiries fall into two categories. A hard inquiry occurs when a lender pulls your report after a credit application; multiple hard inquiries in a short window can shave points temporarily. A soft inquiry occurs when you check your own report, when a lender pre-screens you for an offer, or when an employer runs a background check. Soft inquiries do not appear in the scoring calculation. The three major bureaus, Equifax, Experian, and TransUnion, are each required by federal law to provide one free report per year at annualcreditreport.com. Reviewing your report regularly for errors is one of the most practical steps a family can take.

Paying a collection account is worth doing because it stops additional collection activity and may improve your score under newer scoring models such as FICO 9 and VantageScore 4.0, which treat paid collections less harshly. However, under FICO 8, which many lenders still use, a paid collection continues to appear and can still affect your score. The account will age off your report seven years after the original delinquency date, regardless of whether it was paid. Before making any payment on an old debt, it is worth consulting a consumer credit counselor or attorney, since payment can sometimes reset the statute of limitations on the debt depending on state law.

Credit scores are built entirely from credit report data: payment history, balances, account age, types of credit, and inquiries. Your salary, hourly wage, or household income does not appear on your credit report and is never factored into the score. Lenders do consider income separately when evaluating a loan application, often as part of a debt-to-income ratio, but that is a lending decision, not a credit score input. A household with a modest income and a long history of on-time payments will typically have a higher score than a higher-income household with late payments and high utilization.