Money Smarts Blog

A credit card isn’t just about spending money. It’s a useful tool to access funding when you don’t have cash on-hand, it can help you pay down debt quickly and many offer cash-back perks. (It’s also great peace of mind for the parent of a daughter who travels to college seven hours from home, but I digress). However, only about half of respondents to a recent U.S. News & World Report survey understood how credit worked when they got their first card.

Additionally, 58% believed that carrying a balance helps build their credit score. When I heard that, I’m pretty sure my jaw dropped to the floor. Could it really be true that more than half of Americans buy-in to this myth about credit scores? Survey says … yes!

When it comes to personal finances, there’s clearly a gap in understanding credit. Fear not! Your friendly financial health coach is here to guide you through some of the most common misconceptions — and how to avoid costly mistakes.

MYTH: Carrying a balance helps my credit score

Despite what 58% of you think, carrying a balance on your credit card doesn’t help your score. Instead, you’re paying more on purchases over the long run because of the interest that accrues. Plus, carrying a high balance can increase your credit utilization. As an example, let’s pretend you have a credit limit of $2,000 and you have a $1,000 balance. That means you’re using 50% of your available credit.

To keep your utilization ratio low, consider a credit limit increase (but only if you won’t use the new limit as an excuse to spend more). Now, if your credit limit is raised to $5,000 and you have the same $1,000 balance, your credit utilization ratio drops to 20%. Remember, a lower ratio can boost your credit score — we suggest below 30%.

MYTH: Checking a credit report will hurt my score

Credit scores aren’t impacted by checking your own credit reports (only hard pulls are reported, like when you apply for a loan or new line of credit). In fact, everyone is entitled by law to one free credit report every 12 months from each of the three credit reporting agencies: Equifax, Experian and TransUnion. Through December 31, you can even check your credit reports for free once a week at AnnualCreditReport.com.

Establishing good credit is important because it can help you get lower interest rates and even affect where you live and what job you get. A periodic review each of your three credit reports not only allows you to make sure your personal information is accurate, but it can also help you catch signs of identity theft early.

MYTH: Bad credit can’t be rebuilt

Businesses and lenders want to know you can be trusted with finances, so if you’re habitually making late payments, your score will stay low and you’ll be considered risky. The good news: You can absolutely boost your credit score with a little patience and elbow grease. Because payment history makes up the biggest chunk of your score — 35% to be exact — focus on paying in full, on time every month.

MYTH: Spouses have a joint credit report

You might have a joint bank account, but there’s no such thing as a joint credit report. You and your spouse each have your own, separate from the other. Here’s where it gets a little sticky: Although your reports are separate, if you’re an account holder or cosigner with your spouse, those joint accounts can affect each of your credit reports even if you’re not the primary account holder. For example, if you cosign a loan for a family friend and they miss a payment or two, that late payment will show up on your credit report too.