Personal Finance Coach: Adrianna Gregory Busts Five Credit Score Myths

Want to know the truth about the best way to establish or strengthen your credit score?

By Adrianna Gregory

Credit can be a friend or a foe. Good credit can lead to savings on mortgages and other loans, credit cards, insurance, and even your cell phone plan. Use credit wisely and it can set you up for success. Handle it poorly and bad credit can cost you hundreds of thousands of dollars over your lifetime and hamper your path to financial stability.

Given how important credit is, it’s no surprise that there is a lot of incorrect information and false advertising out there around ways to boost your score. Here are five credit myths I have encountered as a Financial Coach — and the truth about the best way to establish or strengthen your credit score.

We may not know the exact formula that determines your credit score, but we do know which factors matter most. FICO publishes information about these credit factors, giving you a roadmap for how to increase your score. What’s most important?

Making on-time payments every month and keeping credit card balances below 30% of your limit are the top-two habits that can improve your score the most.

Other important factors include building a long credit history, avoiding lots of applications for new credit, and diversifying the types of credit on your report to include a mix of loans and credit cards.

Your credit score provides an at-a-glance view of the health of your overall credit history, but it’s far from the only thing that matters. A potential lender will most likely look at your full credit report, which includes detailed information about specific accounts.

If your report shows that you have a history of on-time payments and that you use less than 30% of the credit available to you, you are more likely to be approved for a loan or credit card. And in general, the better your credit report looks, the better terms you’ll get on any accounts you open, like lower interest rates on loans and credit cards, saving you money over time.

Credit card companies probably want you to think that it’s good to carry a balance month to month, since it means they can charge you interest on the balance that accrues.

The truth: It is good for your score to keep the amount that you owe on your credit cards to less than 30% of the limit available to you, and it’s best to pay down the balance to $0 each month.

The amount you owe in relation to your credit limit — also known as your credit utilization rate — is one of the most important factors in boosting your credit score, along with making on-time payments each month.

Online credit monitoring services, banks, and credit card companies will often advertise new credit cards or loan products and tell you that opening the product can boost your score.

Although it is good for your credit to have a range of types of credit on your report, it’s best to be highly selective in which products you open. Three or four well-managed lines of credit on your credit report will probably look better to potential lenders than a dozen or more that are managed less-well.

Actively seek out the products that are going to be best for you: that means no fees, reasonable interest rates, and the level of customer service you’re looking for.

You’ve probably seen ads for services that promise rapid score increases and tradelines deleted in days. Unfortunately, those promises are a big red flag. They signal that the credit repair service is either running a scam, damaging your credit instead of improving it, or charging you for a service you could do yourself for free.

It takes time to build credit, but if you focus on building a positive payment history and keeping your utilization rate low, as time goes on you will see improvements in your score.