Don't Fall for These Common Credit Myths

March is National Credit Education Month, so we're taking this opportunity to clear up some common credit myths. Over the years, we’ve seen many people fall for these misconceptions.

Credit can be confusing, and there's a lot of misinformation out there. That’s why we’re here to set the record straight and help you make informed financial decisions.

Closing Your Credit Card That's Paid in Full is a Great Idea

It feels like such an accomplishment when you finally pay off a credit card. That sense of relief and freedom makes many people want to close the account immediately to avoid the temptation of using it again. We understand that impulse completely.

While this isn't entirely a myth, closing a credit card can have unexpected consequences. Closing a credit card will lower your available credit, and if it's one with a larger limit that could significantly impact your credit score.

Let's say you have three credit cards with limits of $5,000, $7,000, and $10,000, which gives you a total available credit of $22,000. If you close that $10,000 card, your available credit suddenly drops to $12,000.

If you're carrying balances on your other cards, your credit utilization ratio (how much credit you're using compared to what's available) jumps up, which can lower your score.

If you have multiple credit cards and worry about monitoring all of them or being susceptible to fraud, consider looking at the ones with smaller limits and newer accounts as opposed to the larger limits and older ones.

Closing older accounts will lower the average age of your accounts, which contributes 15% to your overall credit score.

We've seen our members get so excited about paying off their credit cards that they close multiple accounts at once, only to see their credit scores drop.

If you're planning to apply for a mortgage or car loan soon, this could cost you more in interest.

Instead of closing cards, consider putting them somewhere safe and maybe using them for a small recurring bill like a streaming service that you can set to autopay. This keeps the account active without tempting you to overspend.

0% Financing is the Best Way to Pay for Big Purchases

When purchasing big-ticket items like electronics, furniture, or appliances, stores sometimes offer 0% financing. These deals can be tempting, especially when you're spending thousands of dollars.

However, while they may seem too good to pass up, they can impact your credit in unexpected ways, and the fine print often hides details that could end up costing you.

When you accept a 0% financing offer, the retailer or lender often opens a new revolving credit account (like a store credit card or charge account).

This new account appears on your credit report as a new inquiry, which can temporarily lower your score by a few points.

Since these accounts are usually opened for the exact amount of your purchase (or close to it), your credit utilization goes up. That means you're using a big chunk of your available credit, which can lower your credit score.

 While most of these stores now go through big credit card companies like Visa or Mastercard, some still issue their own charge accounts that don't offer the same protections as the major credit card companies. These store cards might not provide the same ability to dispute charges or protect against fraud.

If you do take advantage of these offers, make sure to always read all the terms carefully before signing.

Carrying a Credit Card Balance Helps Build Your Credit Scores

This is probably one of the most common credit myths we hear. Many people believe they need to carry a balance from month to month to show they're using their credit and build their score.

While paying off a loan such as a car loan or personal loan may cause a drop in credit score, the same isn't true for credit card balances.

Your credit report doesn't differentiate between those who pay in full and those who carry a balance. It shows your payment history and the balance at the time it was reported to the bureaus.

Carrying credit card balances across billing periods can even hurt your scores especially if your total balance exceeds 30% of the available credit.

A high utilization rate signals to lenders that you may be relying too heavily on credit, which makes you look like a higher risk.

It's best to always pay off credit card balances in full each month especially to prevent interest charges. The average credit card interest rate is now over 20%, and that's money that could be going towards your savings, retirement, or other financial goals.

You Need to Have a Perfect Credit Score to Get the Best Deals

Credit scores range from 350-850 and we've seen people stress over the fact that they can't get the perfect score or see their perfect score go down by a little.

While there are some proud moments to be in the 850 club, generally if you have a score of 760 and above, you'll likely qualify for the best deals on everything.

Think of it like this: once your credit score is in the "excellent" range, you've already qualified for the VIP treatment. Whether you're at the front or the back of that VIP line, it doesn't usually matter.

You Don't Need to Regularly Check Your Credit Report

Among all the things we try to take good care of in our finances, checking credit reports is probably not one of them.

It's easy to put off because it seems tedious, and many people assume everything is fine until they are denied credit.

A staggering 50% of credit reports contain errors. That's not a typo. Half of all credit reports have mistakes that could be affecting your score and costing you money.

So, it's wise to periodically review your credit scores from each major credit bureau, ideally once a year.

Some of the most common errors include incorrect addresses, outdated previous employers, and paid-off collections that are still showing up.

You can report these errors to the credit bureaus as soon as you notice them, and the credit bureaus are required to investigate within 30 days and give you the results in writing.

You're entitled to one free credit report from each of the three major bureaus (Equifax, Experian, and TransUnion) every year through AnnualCreditReport.com.

We recommend checking one bureau every four months so you can monitor your credit throughout the year.

Conclusion

Above are just a few of the common myths going around about credit you should know. We hope this helps you gain a better understanding of credit during this National Credit Education Month.

If you have questions about your own credit situation, don't hesitate to reach out for personalized advice.

Our credit union in Lafayette and New Iberia, LA, is dedicated to serving our members with heart. We don’t just offer exceptional services, we also educate our members.

If you’re looking for a bank near you in Lafayette or New Iberia, LA, that truly cares about you, contact First Pioneers!