Credit Score Myths That Could Be Costing You

There are two kinds of credit checks: hard inquiries (triggered when a lender reviews your credit after an application) and soft inquiries (triggered when you check your own score, or when a lender pre-screens you). Only hard inquiries can temporarily dip your score — and even then, usually by only a few points. Regularly reviewing your own credit report is actually encouraged, because it helps you catch errors and identity theft early. You're entitled to free weekly reports from each of the three major bureaus at AnnualCreditReport.com.

Your credit utilization ratio — the percentage of your total available credit that you're currently using — accounts for roughly 30% of most credit scores. When you close an old card, you eliminate that card's credit limit from your total available credit. If you're carrying balances on other cards, that same debt now represents a larger share of a smaller credit pool, pushing your utilization higher. Additionally, older accounts contribute positively to your length of credit history, another scoring factor. Closing them can shorten your average account age over time. Learn more about this topic in our article on why your credit utilization ratio matters more than you think.

This is one of the most financially harmful myths in circulation. Credit card issuers report your account activity — including on-time payments — to the credit bureaus regardless of whether you pay in full or carry a balance. What builds your credit is a consistent history of on-time payments and low utilization, not the act of revolving debt. Carrying a balance simply means you pay interest, sometimes at rates exceeding 20% annually, for no credit benefit whatsoever.

Credit scores are calculated using information found in your credit report, which covers payment history, amounts owed, length of credit history, new credit, and credit mix. Your salary, hourly wage, or investment income does not appear in your credit report and plays no role in your score. Income may be assessed separately by lenders when deciding whether to approve a loan — that's a distinct process called underwriting — but it doesn't touch your score itself. This is also why someone with a modest income can have an excellent credit score, and a high earner can have a poor one.

Paying off a collection account is still the right move — some newer scoring models treat paid collections more favorably than unpaid ones, and it removes the risk of further collection activity or lawsuits. However, the record of the collection itself doesn't vanish. Under the Fair Credit Reporting Act (FCRA), most negative information, including collections, can remain on your report for seven years. The silver lining is that the impact of older negative items generally diminishes over time, especially when positive activity continues to build around it.

FICO alone has released dozens of scoring model versions, and different lenders use different versions depending on the type of credit being applied for — a mortgage lender may pull a different FICO version than an auto dealer. Add in VantageScore models and the three separate credit bureaus (Equifax, Experian, and TransUnion), each of which may hold slightly different data, and you can see why the score a free monitoring app shows you may differ from what a mortgage lender sees. The general credit health principles remain consistent across models, but don't be surprised by variation between scores.