By NYLAG Financial Counselors Yhasmine Moran and Eva Mezquita
Credit can be a tricky subject, and there are many misconceptions that can lead you down the wrong path. Luckily, our clients have found financial counseling to be a valuable resource to get back on track with their credit. It is a reminder that working with a financial counselor can provide guidance and support in your financial journey and that it is never too late to set financial goals.
Credit is an especially important topic for low- and moderate-income households and Black and Hispanic families. Several studies indicate that these groups generally have lower credit scores than high-income and white households. Additionally, recent research reveals that credit scores are usually good at predicting whether someone will miss a payment or not. However, credit scores tend to be less reliable for those with “noisier credit bureau files”—meaning people with few credit records or whose records are not as diverse.
Even with these obstacles, it’s crucial to recognize that improving your credit score is entirely possible. Whether you’re just starting to build your credit or looking to improve your current credit score, understanding these myths is key to avoiding costly mistakes. In this post, we’ll debunk some of the most common credit myths and offer practical advice to help you manage your credit wisely.
Myth 1: “I don’t have a credit history; I cannot build credit.”
Many clients come into our office and mention that they were denied when applying for a credit card because they have no credit history. However, this doesn’t mean that someone without a credit history can’t start building credit. In fact, there are credit products specifically designed for those who either don’t have a credit history or want to rebuild it.
Here are some credit products that can help you start building credit:
- Secured Credit Cards
- Credit Builder Loans
- Becoming an authorized user on a close relative’s (or friend’s) credit card account who has good credit
Additionally, Individuals with ITIN numbers can also build credit.
Myth 2: Carrying a Credit Card Balance Builds Credit Scores (Paying minimum payment will help me build credit, paying part of the balance ONLY will help)
Paying only the minimum payment does not help build your credit score faster. It actually keeps you in debt longer and costs more due to interest charges. While making the minimum payment ensures you’re not late, it doesn’t reduce your balance significantly enough to lower your credit utilization or improve your score. To build credit effectively, pay off your balance in full each month to avoid interest and reduce your utilization ratio.
It’s important to note that carrying a balance might seem like it could help build credit, but it can actually hurt your score if you’re not careful. With credit cards, carrying a balance means you’re paying more in interest and taking longer to pay off the debt. Unlike loans, where carrying a balance can sometimes help improve your score, credit cards work best when you avoid balances altogether. To keep your credit score growing, aim to keep your utilization low and your balances paid in full each month.
Follow these tips to avoid carrying balances on your credit card:
- Only add one expense to your credit card at a time.
- Use less than 30% of your credit limit.
- Pay the full balance on your credit card to avoid interest charges.
Myth 3: Having a lot of credit cards will help me build credit.
Diversifying your credit report can help boost your credit score, but this doesn’t mean you should open as many credit cards and loan accounts as possible. We’ve seen clients with 10-15 credit card accounts because they believed that having more credit would help them build their score faster. However, managing so many accounts became difficult, and they ended up closing some or falling into credit card debt, which negatively affected their credit history.
Here are some tips to consider before opening your next line of credit:
- It’s generally recommended to have only 2-3 credit card accounts in your credit report.
- Avoid opening retail credit cards. These cards often come with very high interest rates, and it can be difficult to get customer support when needed.
- Just because you receive mail stating that you’re pre-approved for a credit card doesn’t mean you’re actually approved. Remember that when you apply for a credit product, banks will do a hard credit pull.
- Only open a credit card when it is necessary and when it will help you achieve your financial goals.
Myth 4: Pulling my credit report will lower my credit score.
Many people believe that checking their own credit report will hurt their score, but this is a myth. In fact, pulling your own credit report is considered a “soft inquiry” and does not affect your credit score. Soft inquiries can occur when you check your own credit or when a lender checks your credit as part of a pre-approval process. However, a “hard inquiry,” which happens when you apply for new credit, can slightly lower your score. This is because it suggests you may be taking on additional debt.
To stay on top of your credit, it’s a good idea to check your credit report at least once a year. The three major credit bureaus—Equifax, Experian, and TransUnion—offer free credit reports annually through AnnualCreditReport.com.
Myth 5: Closing Credit Cards Will Help Your Credit Score
Many people think that closing unused credit cards will improve their credit score, but this is not necessarily the case. Closing a credit card can actually hurt your credit score in two ways:
- Reduced Credit Limit: Your total available credit will decrease, which can increase your credit utilization ratio. A higher utilization ratio (the percentage of your available credit that you’re using) can negatively impact your score.
- Shorter Credit History: The length of your credit history makes up 15% of your credit score. By closing an old account, you reduce the length of your credit history, which could potentially lower your score.
Instead of closing cards, consider keeping them open and using them occasionally for small purchases that you can easily pay off.
Think of credit as a seed. It’s not about flooding it with water all at once but about providing the right care—consistent attention and nurturing overtime. Just like a seed grows into a strong, healthy tree, with the right approach, your credit can flourish and provide lasting benefits. The NYLAG Financial Empowerment and Advocacy Unit is here to provide guidance and support throughout your credit-building journey.
Still have questions? NYLAG Financial Counselors help you create a plan to secure a financially stable future.
- If you are currently working with a NYLAG financial counselor, reach out to them now to discuss your student loan options.
- Connect with a NYLAG financial counselor.
