I’ve spent the last decade working in personal finance, and I can’t tell you how many times I’ve heard people repeat the same credit myths over and over again. These aren’t just harmless misconceptions – they’re actually costing people thousands of dollars every year. Some of my clients have literally paid tens of thousands more in interest because they believed these myths.
Today, I’m going to break down the most expensive credit myths I encounter regularly. By the end of this article, you’ll know exactly which beliefs are hurting your wallet and what you should do instead.
Why Credit Myths Are So Dangerous
Before we dive into specific myths, let me explain why these misconceptions are particularly harmful. Your credit score affects almost every major financial decision in your life:
- Mortgage rates: A difference of just 50 points in your credit score can cost you $50,000+ over the life of a 30-year mortgage
- Car loans: Poor credit can add $5,000-$10,000 to your auto loan costs
- Credit cards: Bad credit means higher interest rates and fewer reward opportunities
- Insurance premiums: Many states allow insurers to use credit scores in their pricing
- Employment: Some employers check credit reports during hiring processes
- Rental applications: Landlords often require good credit for apartment approvals
When you make decisions based on false information, you’re not just missing opportunities – you’re actively damaging your financial future.
Myth #1: Carrying a Balance Improves Your Credit Score
The Reality: This is probably the most expensive myth I encounter. I’ve met people who carry thousands of dollars in credit card debt specifically because they think it helps their credit score.
Here’s what actually happens when you carry a balance:
The Real Impact of Carrying Balances
| Credit Utilization | Impact on Credit Score | Monthly Interest on $5,000 Balance |
|---|---|---|
| 0% (paid in full) | Best for credit score | $0 |
| 1-9% | Excellent impact | $20-$75 |
| 10-30% | Good impact | $75-$125 |
| 30%+ | Negative impact | $125+ |
What you should do instead: Pay your balance in full every month. Your credit utilization ratio (the percentage of available credit you’re using) matters much more than carrying a balance. In fact, having a 0% utilization rate is often better than any other percentage.
I had a client named Sarah who was carrying a $3,000 balance on her credit card “for her credit score.” She was paying $45 per month in interest – that’s $540 per year! After I explained this myth to her, she paid off the balance and her credit score actually improved by 35 points within two months.
Myth #2: Closing Old Credit Cards Helps Your Credit Score
The Reality: Closing old credit cards can actually hurt your credit score in two major ways.
How Closing Cards Damages Your Credit
- Reduces your total available credit: This increases your credit utilization ratio
- Shortens your credit history: Length of credit history accounts for 15% of your credit score
Let me show you with a real example:
Before Closing Old Card
- Card 1: $2,000 limit, $500 balance
- Card 2: $3,000 limit, $0 balance
- Card 3: $5,000 limit (old card), $0 balance
- Total: $10,000 limit, $500 balance = 5% utilization
After Closing Old Card
- Card 1: $2,000 limit, $500 balance
- Card 2: $3,000 limit, $0 balance
- Total: $5,000 limit, $500 balance = 10% utilization
Your utilization just doubled! Plus, you lost years of credit history.
What you should do instead: Keep old cards open, even if you don’t use them regularly. Put a small recurring charge on them (like a streaming service) and set up autopay to keep them active.
Myth #3: Checking Your Credit Report Hurts Your Score
The Reality: There are two types of credit inquiries, and most people don’t understand the difference.
Types of Credit Inquiries
Soft Inquiries (Don’t Affect Your Score)
- Checking your own credit report
- Background checks by employers
- Pre-approved credit offers
- Insurance quote inquiries
Hard Inquiries (Temporarily Lower Your Score)
- Applying for credit cards
- Applying for loans
- Applying for mortgages
The truth: You should check your credit report regularly – at least once every four months. I recommend using the free annual reports from annualcreditreport.com, plus services like Credit Karma or your bank’s free credit monitoring.
I check my credit report monthly, and it has never hurt my score. In fact, regular monitoring helped me catch an error that was costing me 40 points!
Myth #4: You Only Have One Credit Score
The Reality: You actually have dozens of credit scores. Different lenders use different scoring models, and each model weighs factors differently.
Common Credit Scoring Models
| Scoring Model | Score Range | Most Common Use |
|---|---|---|
| FICO 8 | 300-850 | General lending decisions |
| FICO 9 | 300-850 | Newer lending decisions |
| VantageScore 3.0 | 300-850 | Credit monitoring services |
| FICO Auto Score | 250-900 | Auto loans |
| FICO Bankcard Score | 250-900 | Credit cards |
Why this matters: The score you see on Credit Karma might be different from the score your mortgage lender sees. Don’t panic if there are variations – focus on the overall trends rather than specific numbers.
Myth #5: Income Affects Your Credit Score
The Reality: Your credit report doesn’t include your income, employment status, or salary information. Credit scores are calculated based on:
What Actually Affects Your Credit Score
- Payment history (35%)
- On-time payments
- Late payments
- Defaults and bankruptcies
- Credit utilization (30%)
- How much credit you’re using
- Individual card utilization
- Overall utilization
- Length of credit history (15%)
- Age of oldest account
- Average age of accounts
- Credit mix (10%)
- Variety of account types
- Credit cards, loans, mortgages
- New credit (10%)
- Recent credit inquiries
- New accounts opened
What this means: Someone making $30,000 per year can have a higher credit score than someone making $300,000 per year. It’s all about how you manage the credit you have, not how much money you make.
Myth #6: Paying Off Collections Removes Them From Your Report
The Reality: Paying a collection account doesn’t automatically remove it from your credit report. The collection can stay on your report for up to seven years from the original delinquency date.
What Happens When You Pay Collections
Before Payment
- Collection shows as “Unpaid”
- Negative impact on credit score
- Collectors may continue calling
After Payment
- Collection shows as “Paid”
- Still appears on credit report
- May have slightly less negative impact
- Collectors should stop calling
Better strategies:
- Pay for delete: Negotiate with the collector to remove the account entirely after payment
- Dispute inaccuracies: Challenge any incorrect information on the collection
- Wait it out: If the collection is old, it might be better to wait for it to fall off naturally
I helped a client negotiate a “pay for delete” agreement on a $800 medical collection. Instead of just paying it and having it marked as “paid,” we got it completely removed from his credit report, which improved his score by 25 points.
Myth #7: Closing Accounts Removes Them From Your Credit Report
The Reality: Closed accounts can stay on your credit report for up to 10 years (if they were in good standing) or 7 years (if they had negative information).
How Closed Accounts Affect Your Credit
Positive closed accounts:
- Continue to age and help your credit history length
- Still count toward your credit mix
- Don’t provide available credit for utilization calculations
Negative closed accounts:
- Continue to hurt your credit score
- Can’t be improved with good payment history
- Still count as negative marks
This is why I rarely recommend closing credit cards unless there’s an annual fee you can’t justify or you have serious self-control issues with spending.
Myth #8: You Need to Carry Different Types of Debt to Build Credit
The Reality: While having a credit mix can help your score, you should never take on debt you don’t need just to improve your credit.
Smart Ways to Build Credit Mix
Good Options
- Use credit cards responsibly (pay in full monthly)
- Finance a car you were going to buy anyway
- Get a mortgage when you’re ready to buy a home
- Consider a small personal loan for debt consolidation
Bad Options
- Taking out loans you don’t need
- Keeping car loans longer than necessary to “help credit”
- Opening store credit cards for small purchases
- Getting a mortgage before you’re financially ready
Remember: the credit mix category only accounts for 10% of your credit score. Don’t let the tail wag the dog.
Myth #9: Authorized User Status Doesn’t Help Your Credit
The Reality: Being added as an authorized user on someone else’s account can significantly boost your credit score, especially if you have limited credit history.
How Authorized User Status Works
When you’re added as an authorized user:
- The account’s entire history is typically added to your credit report
- You benefit from the primary cardholder’s payment history
- The account’s credit limit helps lower your overall utilization
- You don’t have legal responsibility for the debt
Best practices for authorized users:
- Only be added to accounts with excellent payment history
- Make sure the primary cardholder has low utilization
- Choose accounts that have been open for several years
- Confirm the card company reports authorized user activity to credit bureaus
I’ve seen authorized user additions increase credit scores by 50-100 points, especially for people with thin credit files.
Myth #10: Debit Cards Help Build Credit
The Reality: Debit cards have zero impact on your credit score because they don’t involve borrowing money.
Debit Cards vs. Credit Cards for Credit Building
Debit Cards
- Pull money directly from your bank account
- No credit reporting to bureaus
- No impact on credit score (positive or negative)
- No protection against fraud or disputes
Credit Cards
- Borrow money that you pay back later
- Report payment history to credit bureaus
- Can improve credit score with responsible use
- Better fraud protection and dispute resolution
If you’re trying to build credit, you need to use actual credit products. A secured credit card is often the best starting point for people with no credit history.
The Most Expensive Credit Mistakes I’ve Seen
Over the years, I’ve seen these myths cost people serious money. Here are some real examples (names changed for privacy):
Case Study 1: The Balance Carrier
Client: Mike, 34, accountant Mistake: Carried $8,000 in credit card balances across three cards “for his credit” Cost: $1,200 per year in unnecessary interest Solution: Paid off all balances, credit score improved 45 points in 3 months Savings: $1,200 annually, plus qualified for better rates on future loans
Case Study 2: The Card Closer
Client: Jennifer, 28, teacher Mistake: Closed her oldest credit card because she wasn’t using it Cost: Credit score dropped 30 points, paid extra $2,400 on car loan Solution: Kept remaining cards open, gradually rebuilt credit length Recovery time: 18 months to get back to original score
Case Study 3: The Income Worrier
Client: David, 45, small business owner Mistake: Avoided applying for better credit cards because his income fluctuated Cost: Stuck with high-interest cards, missed out on $500+ in annual rewards Solution: Applied for better cards during high-income months Benefit: Saved $300 annually in interest, earned $500+ in rewards
How to Actually Improve Your Credit Score
Now that we’ve busted these myths, let me give you a proven action plan for improving your credit score:
The 90-Day Credit Improvement Plan
Days 1-30: Foundation
- Get your free credit reports from all three bureaus
- Dispute any errors you find (this alone can boost scores significantly)
- Set up automatic payments for at least minimum amounts on all accounts
- Calculate your utilization ratios on each card
Days 31-60: Optimization
- Pay down high-utilization cards first
- Request credit limit increases on existing cards
- Consider authorized user opportunities with family members
- Stop closing old accounts unless there are annual fees
Days 61-90: Acceleration
- Keep utilization under 10% across all cards
- Pay balances before statement dates to show lower utilization
- Consider a secured card if you need more available credit
- Monitor your progress with free credit monitoring
Long-Term Credit Strategy
Monthly Tasks
- Check credit reports for new information
- Pay all bills on time
- Keep credit utilization low
- Monitor for identity theft
Quarterly Tasks
- Review credit goals and progress
- Consider new credit opportunities
- Reassess credit card rewards programs
- Check for pre-qualified offers
Annual Tasks
- Get full credit reports from all three bureaus
- Negotiate annual fees or close unnecessary cards
- Review and update credit monitoring services
- Plan major purchases that might affect credit
Tools and Resources That Actually Help
Based on my experience, here are the most useful resources for managing credit:
Free Credit Monitoring
- Credit Karma: Good for VantageScore monitoring and credit education
- Experian: Offers free FICO 8 scores
- Chase Credit Journey: Free for everyone, not just Chase customers
- Discover Credit Scorecard: Free FICO scores for everyone
Credit Report Sources
- AnnualCreditReport.com: Official free annual reports
- Credit card issuers: Most major cards offer free FICO scores
- Banks: Many banks provide free credit monitoring to customers
Helpful Apps and Tools
- Mint: Tracks all accounts and provides credit score monitoring
- YNAB (You Need A Budget): Helps with budgeting to pay down debt
- Personal Capital: Free net worth tracking and credit monitoring
Red Flags to Watch Out For
Be careful of services or advice that:
- Promise to “repair” your credit for a fee (you can do everything they do for free)
- Guarantee specific credit score improvements
- Advise you to dispute accurate negative information
- Suggest creating a “new” credit identity
- Charge money for credit reports or scores you can get free
When to Get Professional Help
While most credit improvement can be done yourself, consider professional help if:
- You’re dealing with identity theft
- You have multiple collection accounts to negotiate
- You’re preparing for a major purchase (home, business loan)
- You’re overwhelmed by the process and need accountability
Look for non-profit credit counseling agencies that are HUD-approved. Avoid for-profit “credit repair” companies that charge upfront fees.
The Bottom Line: What This All Means for Your Wallet
Understanding credit myths isn’t just about having good financial knowledge – it’s about saving real money. Let me break down the potential savings:
Annual Savings from Better Credit
Credit Cards
- Lower interest rates: Save $500-$2,000 per year on carried balances
- Better rewards: Earn $300-$1,000 annually in cash back or points
- No annual fees: Save $95-$500 on premium cards you might not need
Loans
- Auto loans: Save $2,000-$5,000 over loan term
- Personal loans: Save $1,000-$3,000 over loan term
- Mortgages: Save $50,000-$100,000 over 30 years
Other Areas
- Lower insurance premiums: Save $200-$500 annually
- Better rental terms: Avoid security deposits ($500-$2,000)
- Employment opportunities: Access to better jobs
Moving Forward: Your Next Steps
I’ve given you a lot of information, but don’t try to implement everything at once. Here’s how to get started:
This Week
- Check your credit report from one bureau
- Set up automatic minimum payments on all accounts
- Calculate your current utilization ratios
This Month
- Get reports from all three credit bureaus
- Dispute any errors you find
- Pay down your highest-utilization cards
- Stop carrying balances “for your credit”
Next Three Months
- Request credit limit increases
- Consider becoming an authorized user
- Monitor your score improvements
- Avoid closing old accounts
Remember, improving your credit is a marathon, not a sprint. The habits you build now will save you money for decades to come.
The credit myths we’ve discussed today are costing Americans billions of dollars collectively. By understanding the truth behind these misconceptions, you’re already ahead of most people. Use this knowledge wisely, stay consistent with good credit habits, and watch your financial opportunities grow.
Your future self – the one buying a house, starting a business, or simply enjoying better financial flexibility – will thank you for taking the time to learn the truth about credit today.