Think you know how credit actually works?
Some credit myths might cost you money and hold you back from financial freedom.
But don’t worry, we’re here to bust these credit myths wide open! From fears like "checking your credit hurts your score" to the belief that you need piles of cash to build credit, we’ll clear up the confusion and show you how to build credit without the scary stuff.
From fears like "checking your credit hurts your score" to the belief that you need piles of cash to build credit, these misconceptions might be keeping you from the financial freedom you deserve. But don't worry, credit doesn’t have to be scary or confusing.
Often, these myths come from outdated advice or misunderstandings about how credit works. Let’s start by tackling one of the most common myths: the idea that carrying a balance on your credit card is a good way to boost your credit score.
Myth #1: Carrying A Balance Will Improve Your Credit Score
Here’s a classic one: many people believe that carrying a small balance on their credit cards shows lenders they’re responsibly using credit. If this sounds familiar, it’s time to exorcise that myth from your mind!
The Truth
Your credit utilization ratio impacts your credit score, which is the percentage of your available credit you’re using. But here’s the kicker: carrying a balance doesn’t help! In fact, it hurts because you’re paying interest, and that interest doesn’t do a thing for your score. To keep your credit score healthy, you need to pay off your balance in full each month.
How to Banish This Myth:
Pay off your balance in full each month to keep your credit utilization low and avoid paying interest.
Track your spending to ensure you stay under 30% of your credit limit.
Use tools like Arro’s app to help you stay on top of your spending and monitor your credit progress!
Myth #2: Paying Only The Minimum Payment Will Keep You Safe
It might feel like you’re managing your credit well when you pay the minimum payment each month. After all, you’re avoiding late fees, right? Well, this myth is just like a monster that keeps getting bigger.
The Truth
Minimum payments only cover interest and fees, not the principal balance. That means you’re stuck in a cycle of debt. For example, if you owe $10,000 at a 22% APR and make only the minimum payments, it could take roughly 32 years (384 months) to pay it off. Over that time, you could end up paying an additional $17,000–$18,000 in interest. This is how credit card debt can quickly spiral out of control, leaving you paying far more than you borrowed.
How to Banish This Myth:
Pay more than the minimum. Even a small extra payment can help reduce your debt much faster.
Try the snowball method (pay off smaller balances first) or the avalanche method (pay off high-interest debt first).
Look into balance transfers or debt consolidation to save on interest and speed up your repayment.
Myth #3: Closing Old Credit Cards Helps Your Score
When you’ve paid off an old credit card, it’s tempting to close it to simplify things. But don’t fall for this one. Closing old credit cards can actually hurt your credit score.
The Truth
Closing old accounts reduces your total available credit, which increases your credit utilization ratio and lowers your score. Plus, closing accounts shortens your credit history, which makes up 15% of your FICO score. Keeping old accounts open, even if you don’t use them often, is actually a good move to keep your credit score in the clear.
How to Banish This Myth:
Keep old credit cards open, especially if they don’t have annual fees.
Use them occasionally for small purchases and pay them off quickly to keep the accounts active.
Set up automatic payments for small bills or subscriptions to keep them in use without risk.
Myth #4: Checking Your Credit Score Will Hurt It
If you’ve heard that checking your own credit score will hurt your credit, it’s time to banish that myth from your mind immediately.
The Truth
Checking your own credit score is a soft pull, meaning it has no impact on your score whatsoever. A hard pull, like when a lender checks your credit during a loan application, can cause a slight dip, but checking your score yourself doesn’t do a thing. In fact, it’s a great idea to keep tabs on your credit regularly.
How to Banish This Myth:
Regularly check your credit report for accuracy and any signs of fraud.
Use free credit score tools and monitoring apps like Arro to keep track of your progress.
If you spot any discrepancies, dispute them immediately to avoid negative impacts.
Myth #5: All Debt Is Bad Debt
Another myth is the belief that all debt is bad for your credit score. This is a scary thought, but not all debt should be feared.
The Truth
Not all debt is created equal. While excessive debt can certainly harm your credit, responsible debt management can actually improve your score. Credit cards, auto loans, and even mortgages can help build your credit score when used properly. The key is to keep credit utilization low, make timely payments, and avoid accumulating excessive debt.
How to Banish This Myth:
Use credit cards responsibly and pay off the balance in full each month.
When taking out auto loans or mortgages, make sure your debt is manageable, and always make on-time payments.
Avoid payday loans or high-interest loans, as they often lead to a cycle of debt that hurts your credit.
Banish The Myths And Build Your Credit
Credit myths can feel like roadblocks on your financial journey, keeping you from reaching your goals. But with Arro, building credit is simple, clear, and stress-free. You don’t need to be stuck with outdated advice or confusing jargon. Whether you're just starting or looking to rebuild, Arro is your guide to navigating the credit maze without the confusion.
By following easy steps like paying off your balance in full, making more than the minimum payment, and keeping your cards open, you can start building a healthy credit score today. And with Arro’s AI-powered credit-building app, you’ll get real-time guidance, tailored tips, and a clear path to credit success.
Whether you’re just getting started or rebuilding your score, Arro is here to support you every step of the way. You’ll learn as you go, and we’ll cheer you on as you reach each milestone. Arro’s AI coach, Artie, is always available to give you personalized advice, helping you make smarter decisions and build good credit habits that last.
Ready to face your credit fears? Start building with Arro. No tricks, just progress.
FAQs
1. Can I build credit if I don’t have a credit card?
Yes, you can still build credit through credit-builder loans, rent payments, or using alternative data such as utility bills, depending on the lender. It’s important to make on-time payments for any credit-related accounts, even if they’re not credit cards.
2. How does making multiple credit inquiries affect my score?
When you apply for new credit, each application results in a hard inquiry. While a few inquiries in a short period of time for a specific purpose, like shopping for a mortgage, usually won’t hurt your score significantly, multiple inquiries over time can lower your score. It's important to space out your credit applications to avoid excessive hard pulls, which could make lenders view you as a higher risk.
3. Does paying off old collections improve my credit score?
Paying off old collections can improve your credit score in certain circumstances, but it doesn't automatically remove the account from your credit report. Once the debt is paid, it will be marked as “paid” or “settled,” but the negative impact may still linger for a few years. However, settling or paying off the debt can be viewed more favorably by future creditors when you apply for new credit, as it shows you're taking responsibility for your financial obligations.
4. Can I build credit if I don’t have a Social Security Number (SSN)?
Yes, you can build credit without an SSN! Many newcomers to the U.S. or individuals without a traditional SSN can apply for credit with an Individual Taxpayer Identification Number (ITIN). Some financial institutions and credit card companies offer ITIN-based credit cards, allowing individuals to start building credit without needing a Social Security number. It’s important to ensure the lender reports your credit activity to the credit bureaus to help build your score.
