Fact or Fiction? Don't let credit myths cost you

At one time or another, we’ve all fallen for an urban myth that turned out to be factually false. Think cracking your knuckles causes arthritis, going outside with wet hair gives you a cold, bats are blind or that carrots give you night vision.

Most myths are harmless, but when it comes to your finances, believing fiction instead of fact can cost you.

Join our experts as they separate fact from fiction and debunk some of the most common myths about credit. The truth might surprise you—and a good credit rating can help you score big.

Don’t let credit myths cost you.

We dig deep into credit fallacies to make sure you stay comfortably afloat.

Fact or fiction: Carrying a balance improves your credit score

This is one of the biggest credit myths out there and one of the most expensive.

The best way to build a healthy credit score is to use your credit card wisely. Make purchases you know you can afford and pay the balance in full by the due date. Whether you charge a little or a lot—$20 or $2,000—doesn’t matter. What does, is that you consistently demonstrate that you can borrow responsibly and repay what you owe. 

But don’t carry a balance from month to month. In fact, carrying a balance doesn’t improve your credit score. It simply means paying more interest on the money you borrowed.

The real reward is that a strong credit score can pay dividends. It can help you qualify for lower interest rates on mortgages, personal loans and other forms of credit. Over time, that can translate into thousands of dollars in savings. 

Now that's a fact you can bank on.

Fact or Fiction: Checking your own credit score hurts your credit rating

This is another piece of fiction and keeps many people from monitoring one of their most important financial health indicators.

There are two types of credit checks: hard inquiries and soft inquiries.

A hard inquiry happens when you apply for credit, whether it’s a mortgage, car loan or credit card, and a creditor reviews your credit report to assess your credit worthiness. Are you a reliable risk? These inquiries stay on your credit report for up to six years depending on the credit bureau and multiple credit applications within a short period can signal they you’re an increased borrowing risk.
This can cause a small, temporary dip in your credit score.

Checking your own credit score, though, is considered a soft inquiry. Soft inquiries don’t affect your credit rating, so you can check your score as often as you like without worrying about that dip.

In fact, our financial experts recommend checking your credit report at least once a year to see where you’re at. It’s an easy way to track your progress, catch errors, spot signs of identity theft or fraud, and make improvements to boost your score before applying for a loan or mortgage. 

Now that’s a fact worth knowing.

Fact or Fiction: A higher income means a higher credit score

In fact, it does not. Your income has nothing to do with your credit score.

Whether you’re rolling in cash or watching every dollar, your credit rating is based on one thing: how responsibly you manage borrowed money. 

Using your credit card or taking out a loan, and paying it back on time, is what builds good credit. The amount you earn isn’t part of the equation. What does matter is borrowing only what you can comfortably repay and making your payments when they are due.  

You could be one of the wealthiest people in the world, but if you consistently miss payments or carry unmanageable debt, your credit score will suffer. On the flip side, someone with a modest income who pays their bills on time can earn an excellent credit rating.

When it comes to credit, responsible habits and not a big paycheque are the real equalizer.

Now that’s a fact worth keeping in your pocket.

 

Fact or Fiction: Closing a credit card improves your credit rating

There is a common belief that having fewer credit cards automatically improves your credit score. This is a piece of fiction, but with a tiny bit of fact.

One factor creditors look at is your “debt to credit utilization ratio”. In simple terms, that’s how much credit you have available compared to how much you’re using.

Let’s say you have two credit cards, each with a $10,000 credit limit, and a $500 overdraft on your chequing account. Together, that’s $20,500 in available credit. The is the credit part of the debt to credit utilization ratio. 

If you carry a $10,000 balance on one credit card, you’re using about 49 per cent of your available credit.

Now let’s say you close the second credit card, while still owing the same $10,000 on the first card. Suddenly, your available credit drops to $10,500, pushing your credit utilization ratio to roughly 95 per cent.

From a lender’s perspective, that higher ratio can signal greater risk, even though you haven’t borrowed another dollar. They know you could always shift priorities and pay them back by using your other available credit to do so.

And there’s another reason to think twice before cancelling a card. If it’s the oldest account on your credit report, closing it could shorten your credit history, another factor that influences your credit score.

Now that doesn’t mean you should keep every credit card you’ve ever opened. But before cancelling one, consider how it could affect both your available credit and your credit history.

Now that’s a fact you can take to the bank.

Fact or Fiction: Paying off an overdue balance removes it from your credit report

Paying off an overdue balance is absolutely the right move, but it doesn’t erase the past.

Your credit report is designed to show your borrowing history, so late payments and other negative information generally remain on your credit report for about six years.

The good news? Potential lenders will also see that you’ve paid or settled the debt. Taking responsibility for an overdue account is far better than leaving it unpaid, and as you continue to make your payments on time, the impact of past mistakes gradually lessens.

The best way to rebuild your credit is with consistent, responsible borrowing. Make your payments on time, keep your balances manageable and borrow only what you know you can comfortably repay.

The history may stay on your credit report for a while, but it doesn't have to define your financial future.

Now that's a fact worth building on.