5 Credit Score Myths That are Keeping You Broke

Credit cards and credit scores can be a super confusing topic, and that isn’t by accident.

In 2018, consumers paid over $104 BILLION (with a ‘B’) in credit card interest and fees.

On one hand, credit cards seem to be a good way to “build credit” and earn some cash back or travel rewards, but credit card companies have been posting record revenues over the last few years.

JP Morgan Chase posted a record-setting revenue of $123 billion in 2020, while the average credit card debt in America hovers around $5300.

Something isn’t lining up here.

Does a credit score even matter in 2021? Should you keep a balance to improve your score? How do you actually improve your credit score?

Today, we’re tackling 5 credit score myths that are keeping you broke.

After reading, you’ll understand how your credit score works, if it’s important or not, 5 credit score myths to stop believing, and how to increase your score without taking on extra debt!

What is a Credit Score?

Let’s take a second and dive in to what a credit score actually is.

A credit score is a number between 300 and 850 used to measure someone’s “creditworthiness.”

Aka, do banks want to lend you money or not because of how likely you are to pay it back.

The higher the score, the better you look to lenders when shopping around for a loan.

The typical FICO credit score ranges are listed below (straight from the devil itself, Experian):

• Exceptional: 800 – 850
• Very Good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: 300 – 579

Having a score of 700 or higher may result in a lower interest rate, lower security desposit for an apartment, and a larger line of credit.

A score of 640 and below might disqualify you for some loans, result in a higher interest rate, or require a co-signer.

It is possible to have no credit score, if you have absolutely no debt or credit cards. Once you close all of your accounts, you no longer exist to FICO (Dave Ramsey would be so proud).

How is Your Credit Score Calculated?

So, how is a credit score actually calculated?

There are 5 main categories weighed differently that make up your credit score (it’s still a mystery exactly HOW they calculate it), but those categories are:

• Payment history, 35% (do you pay on time?)
• Amount owed, 30% (percentage of available credit that you’re actively using, aka credit utilization)
• Length of credit history, 15% (the age of your oldest account, newest account, and average age of all your accounts)
• Credit mix, 10% (variety of credit cards, mortgage loans, student loans, etc)
• New credit lines, 10% (have you opened a lot of new accounts in a short amount of time?)

Paying on time and your credit utilization percentage make up the majority of your credit score.

Basically, lenders just want to see that you actually pay your bills on time and aren’t overextending yourself with debt payments (keep your overall credit utilization under 30% of your total credit limit for the best results).

Have a longer credit history will favorably impact your score, but it isn’t necessary for a good score.

Don’t worry too much about credit mix and new credit lines (just don’t go open 5 credit cards in one week and you’ll be fine).

Don’t believe me?

I got all of this information straight from myFICO.com, so check it out if you want a deeper dive into any of these categories.

Does Your Credit Score Matter?

Yes, and no.

If you never plan to take out a loan for anything or apply for a credit card, then a credit score doesn’t matter at all for you.

For the rest of us “regular folk” who will need to get a mortgage at some point, having a good credit score is helpful.

The security deposit for my apartment was also lower because I have a good credit score.

Even though it wouldn’t have been the end of the world to have to put down $1000 instead of $500, it was convenient to keep that extra $500 in my pocket.

In my experience, it’s better to have a good credit score than to have no credit score.

It is exponentially worse to have a bad credit score than no credit score.

However, your credit score isn’t everything, so don’t spend a ton of time freaking out about it.

As long as you’re paying down your debt, not missing payments, and keeping your credit utilization low, you’ll see your score increase over time.

740 is the cut-off to get the best home loan terms, so there’s really no incentive to go out of your way to increase your score much beyond that.

Credit scores are basically playing a game with the big credit bureaus. Keep borrowing money and doing what they say, and maybe they’ll reward you with a “good” score.

Life is easier with a good score. But a good score isn’t worth taking on unneccessary debt just to “build credit.”

And there is a way to outsmart the banks, build a good credit score, AND stay out of debt!

5 Credit Score Myths That Are Keeping You Broke

I think a lot of the mistakes people make with their credit cards, credit scores, and borrowing money in general come from misinformation.

And when it comes to credit scores, there is no shortage of misinformation out there.

So I wanted to go directly to the source (Experian and myFICO) and bust some of these credit score myths that we often hear.

Believing these 5 credit score myths will keep you broke and in debt forever.

#1 – Keeping a Credit Card Balance Increases Your Credit Score

The most common credit score myth I hear is that letting your credit card balance roll over every month increases your score.

THIS IS NOT TRUE.

Leaving a balance means that you’ll be paying credit card interest rates on the amount rolled over, which is a big no-no when it comes to managing your money.

Credit card interest rates are some of the highest you’ll find, and often range from 15-25%!

It is doubly stupid to pay credit card interest if you can afford to pay the balance off in full every month.

In fact, this post on the Experian blog flat-out says, “Paying your credit card balance in full every month can help your credit scores.”

Paying off your balance will lower your credit utilization, show that you make your payments on time, and aren’t overextended.

There you have it folks. Credit score myth #1 busted.

#2 – Having a High Credit Score Means You’re Good With Money

While having a high credit score is generally a good thing, it doesn’t necessarily mean that you’re good with money.

If you are great at managing debt payments and have done so for a really long time, you could easily have an 850 credit score.

But does having 3 car loans, a mortgage, a credit card for every store you shop at, and student loans that you’ve had for over 20 years mean that you’re good with money?

What your credit score doesn’t take into account is your net worth, savings rate, retirement account balances, income, emergency savings, and overall cash flow.

I would argue that someone with no credit score who saves 30% of their income every month is way better with money than the Joneses who financed their couch to “build credit.”

Why do you need to build credit if you already have an 850 credit score, Jan?

However, the credit bureaus and banks will probably disagree with me here. They want you to be in debt up to your eyeballs, have a great credit score, and continue borrowing more so they can keep making money off you.

Banks are NOT your friend, y’all.

Of course, it is possible to have a good credit score AND be good with money (like having one credit card, using it responsibly, and paying it off in full every month).

But a high credit score doesn’t automatically indicate that someone is good with money. It just means that they’re good at managing debt.

Case in point: the Joneses.

#3 – You Should Finance Everything to Increase Your Score

Another credit score myth is that you should finance everything so that you can build credit.

Credit mix only makes up 10% of your credit score, remember? So this portion alone won’t prevent you from getting a mortgage or affect your score too negatively.

The benefits of having a score much higher than 740 really aren’t there, anyway.

Plus, opening a ton of new lines of credit and financing everything in a short amount of time can actually hurt your score! (New lines of credit also account for 10% of your credit score)

Again, if you don’t believe me, check out this post on the myFICO blog!

Even though I have a high credit score and could get the best financing deals on cars, appliances, and furniture, I choose to save up and pay cash instead.

Getting in the habit of only considering the monthly payments can easily cause you to overextend yourself, spend more than you originally planned, and pay more interest.

Of course, the banks want you to finance because they make money when you do!

So it’s important to be careful when you’re considering getting a loan for something (especially if that something is a consumer good).

• Could you save up and pay cash?

• Do you have more money invested in retirement accounts than the item costs?

• How much will you be spending in total over the life of the loan?

These questions can help you decide if financing that $2000 couch really makes sense.

Don’t let people fool you into thinking that financing helps your credit score!

#4 – You Should Treat a Credit Card Offer in the Mail as Income

I didn’t think that I’d have to include this one as part of my list of credit score myths, but my boss at work told me that he knew of several people who treat those credit card offers in the mail as income.

Just to be clear, if you get a $10,000 credit card offer in the mail, it is NOT income.

It is a LOAN. A very bad loan with a very bad high interest rate!

Think of credit card debt as taking out a 20% interest loan to buy stuff you don’t need.

Signing up for every credit card offer you’re eligible for and then maxing out the card is one of the worst things you can do for your credit score. Especially if you don’t make the payments on time (or at all).

My suggestion?

Ignore the offers. Throw them in the trash.

Yes, even the ones that promise 0% APR for the first year!

And if you’re tired of getting those preapproved credit card offers in the mail (like me), you can remove yourself from the distribution list here.

#5 – Believing That You’ll Always Be in Credit Card Debt

And the last credit card myth on this list is believing that you’ll always be in credit card debt.

I totally understand how crushing it feels being in credit card debt. Those interest rates are no joke, and it can feel like you’re making no progress because of the interest.

You first have to believe that you can pay off your credit card debt. Stop saying things like, “Everyone has credit card debt” and “I’ll never be able to pay it off.”

Those statements aren’t true, because there are people every day who pay off their credit card debt and stay out of it!

And you can be one of them!

Work like crazy for a few months and throw all of your money at your credit card debt. Stop using your credit card. Cut down on eating out, don’t go shopping for a few months, and do everything you can to pay it off as fast as possible.

Future you will so happy you did.

Part of being an adult is learning how to do things that will benefit future you, even if it’s doesn’t feel good in the moment.

Credit card debt sucks. We need to stop normalizing living above our means with easy credit lines.

Related: Debt Snowball vs. Avalanche Method: Which Debt Payoff Plan is Best for You?

How to Have a Good Credit Score with No Debt

What if I told you that there is a way to outsmart the credit giants and obtain a good score, without taking on additional debt?

It’s pretty clear that life is easier if you have a good credit score.

So how do you obtain said good credit score without taking on the ~perfect~ amount of debt and showing that you are responsible by paying it on time?

Here’s how to build a good credit score without being in debt your whole life:

1. Open a single credit card (I personally use and recommend the Chase Freedom Unlimited. You get 3% cash back on dining and drugstores, and 1.5% cash back on everything else. There is also no annual fee to worry about!)
2. Put your regular, monthly expenses on the credit card (only what you can afford to pay off every month)
3. Make sure that your expenses do not exceed more than 30% of your credit limit
4. Pay the card off in full every month (you can also pay multiple times per month)
5. Watch your credit score slowly increase over time!

This is the strategy that I personally use, and my credit score is in the “very good” range. I have no debt and my average age of credit history is only two and half years.

If credit cards tempt you to overspend, try just putting your gas or groceries on the card at first. It doesn’t matter how much or little you spend, as long as it falls underneath 30% of your total credit limit.

If your credit limit is $3000, don’t spend more than $1000 at a time on your credit card before paying it off in full.

You’ll also accrue some cash back or travel rewards just for paying your regular ‘ole bills on time! How nice of Chase Bank!

Here’s a secret: Chase Bank can only afford to pay you that measly 1.5% cash back because millions of other people are in credit card debt making them billions of dollars.

They literally have entire teams of people figuring out how to trick you to spend more on your credit card and go into debt. Don’t fall for it!

So DO NOT go into credit card debt just to get the points. The math on that will never work out in your favor.

Overall, if you follow this strategy and don’t fall for these 5 credit card myths, you’ll have a good enough credit score to get a loan or rent an apartment. And that’s all that really matters!

So don’t freak out if you don’t have an 800+ credit score. Excellent credit scores are overrated, anyway.

Being “good” or “very good” will get you just as far as being “excellent.”

And that phrase isn’t just reserved for credit scores.

-Megan