It helps to learn as much as possible about the rules and regulations in regards to credit. Not only will educating yourself help you stay on top of your finances, but it will also help you improve your credit score in the process. These are just a few of the most common credit misconceptions you should be aware of:
Misconception 1: Closing an account once it's paid off is a good idea
Keeping your credit card balance to a manageable level can help you stay out of debt, but closing a zeroed-out account entirely will be counterproductive. If you close one of these accounts, your credit score will take a hit. Shutting down accounts will increase your credit utilization ratio, the ratio of how much credit you use compared to your available limit. Instead of closing it down, simply only use it sparingly. You may be afraid of overspending and sinking back into debt, but it is important to continue using your card. You don't have to let the balance get out of hand, but making a purchase every now and again will benefit you.
Misconception 2: Checking your credit report hurts your score
This misconception is not entirely false, but it will only hurt your score in certain situations. You are allowed a free credit report from each of the three major credit bureaus – Experian, Equifax and TransUnion – every year. This helps you stay abreast of the state of your credit and is generally referred to as a soft inquiry. On the other hand, your credit score can take a hit if a lender or creditor looks at it, which usually occurs when you apply for credit or a loan. This process is referred to as a hard inquiry.
Misconception 3: Co-signing for an account means I won't be responsible
Even though you may not be the one actually paying for this loan or credit card, you are still legally responsible for the account. If your family member or friend you co-signed the loan with does not make a payment, this negative mark will show up on your credit report. This is why it is important to make sure the person you are co-signing the loan with is responsible for his or her finances.