Credit Myths That Could Be Costing You Points

Credit inquiries come in two types. A soft inquiry occurs when you check your own score, or when a lender pre-screens you for an offer — these are invisible to scoring models and cannot affect your score. A hard inquiry occurs when a lender pulls your report as part of a formal credit application. Hard inquiries can shave a few points temporarily, but the effect is modest and typically fades within a year. You can — and should — monitor your own credit regularly without any concern. Each of the three major bureaus (Equifax, Experian, and TransUnion) is required by federal law to provide you one free report per year at AnnualCreditReport.com.

Your credit utilization ratio compares the balances you carry to the total credit available across your accounts. When you close a card, that available credit disappears from the calculation. If you carry any balances on other cards, your utilization ratio rises — and a higher ratio generally means a lower score. Closing an older card can also shorten your average account age, which is another scoring factor. Before closing any account, weigh those risks carefully. In many cases, keeping a zero-balance card open does less harm than closing it.

FICO and VantageScore scores are calculated entirely from information in your credit report: payment history, amounts owed, length of history, new credit, and credit mix. None of that data includes your salary, hourly wage, or household income. A high earner with a pattern of missed payments can have a poor score, while someone with a modest income who pays consistently on time can have an excellent one. Lenders may separately consider income when evaluating a specific application — but that evaluation happens outside the score itself.

This is one of the most costly myths in personal finance. Scoring models reward responsible use of credit — making on-time payments and keeping utilization low. They don't reward you for paying interest to your card issuer. Carrying a balance from month to month increases your utilization ratio (which can hurt your score) and costs you interest at rates that often exceed 20% annually. For a full explanation of why this myth persists and how balances actually affect scores, see why carrying a balance does not build credit.

Under the Fair Credit Reporting Act (FCRA), most negative items — including late payments, collections, and charge-offs — can remain on your credit report for seven years from the date of the original delinquency. Bankruptcies can stay for up to ten years. Paying off the debt doesn't erase the history; it shows the account as 'paid' or 'settled,' which is better than an open delinquency but doesn't reset the clock. If you believe a negative item is inaccurate, you do have the right to dispute it. Disputing errors on your credit report explains that federal process clearly.