Advice | Credit score facts vs. myths: 5 things to know

Whether we like it or not, credit scores are integral to our financial lives.

This three-digit number greatly influences whether we qualify for a mortgage, auto loan or apartment lease. It also can determine how much we pay for home or car insurance.

But many people don’t know about how the ratings work. And there’s a lot of animosity about the grading algorithm.

More than 2,000 comments were submitted after a column in which I explained why my perfect 850 credit scores dropped after paying off my home. And, yes, you have more than one. The basic FICO score ranges from a low of 300 to a high of 850.

“The credit card business calls customers who pay off their balance every month ‘deadbeats,’” one commenter wrote.

Another wrote: “I have no late payments in 36 years, carry over very few if any monthly [credit card] balances, only use 2 percent of my total available credit, and I’ve never received a score higher than 830. And it drops every now and then for no apparent reason. I know I have outstanding credit … Pay no attention to the man behind the curtain.”

Though frustrating, you should pay attention to how credit scoring works.

Credit scores matter when lenders tighten credit, as many do when there’s a recession or economic downturn.

In June, the overall rejection rate for credit applicants climbed to 21.8 percent, the highest level since June 2018, the New York Fed reported. The increase in rejections was broad-based across age groups and highest among those with credit scores below 680.

If you want a better score, or to just keep the great one you have, let’s explore five credit score myths and facts.

I had a perfect 850 credit score. Then I paid off my house.

1. Myth: You need to carry a balance to boost your credit score.

If you pay your debt in full and on time, you can have excellent credit. Lenders want to see that you use credit responsibly, not that you carry a balance.

Carrying balances from month to month and incurring interest does not help your score. The credit score rewards an open and active account in good standing with a zero balance.

2. Fact: Medical debt under $500 should no longer be in your credit report.

Nearly 1 in 5 U.S. households have reported having some form of overdue medical debt, according to the Consumer Financial Protection Bureau.

In April, the three major credit bureaus — Equifax, Experian and TransUnion — announced that medical collections with balances of $500 or less would no longer appear on consumer credit reports.

When medical collection data is removed, people’s scores can jump significantly — 25 points, on average in the first quarter after their last medical debt is removed from their credit report, according to the CFPB.

If your report has a medical collection under $500, you should dispute that information with the credit bureau. The CFPB notes that the change does not include credit card collections, even if you used your credit card to pay for a medical expense under $500.

If you try but fail to get a credit bureau to remove the medical debt from your credit report or investigate another issue, you’re more likely to get a response if you file a complaint with the CFPB at You can also submit your grievance over the phone at (855) 411-2372. The number is (855) 729-2372 for TTY/TDD.

Never Google ‘free credit report.’ Do this instead.

3. Myth: You need to keep your credit utilization under 30 percent.

Thirty percent of your credit score is made up of amounts owed or credit utilization, which is how much credit you’re using compared with your total credit limit.

You’ve probably heard that consumers should have a credit card utilization rate of no more than 30 percent. So, for example, if your credit card limit was $1,000, you should keep your balance to $300. This suggested guideline would apply for each individual credit card and the overall utilization for all your cards.

If you’re using a high percentage of your available credit, or you’re close to maxing out your credit cards, that can have a negative impact on your FICO score.

But the truth is that 30 percent ceiling isn’t a hard-and-fast rule. It’s a benchmark used to discourage consumers from overextending themselves.

If you want more personal finance advice that’s timeless, order your copy of Michelle Singletary’s Money Milestones.

But if you’re aiming for a super high credit score, use a low percentage of your available credit. Low credit utilization can push you into an excellent credit range.

As of April, the average revolving credit card utilization was 4 percent for those with an 850 on the FICO Score 8 credit-scoring model.

4. Myth: You should never close a credit card account.

If you have outstanding credit card debt, wait until you’ve paid it off before closing the account. If you’re carrying balances and you close an account, it may cause your overall credit utilization rate to increase, which in turn can result in a dip in your credit score.

There are good reasons to close a credit card account. The annual fee may be too high, or you’re trying to control the temptation to spend.

If you’ve established a long history of responsible credit management by, among other things, paying your bills on time and keeping credit card balances low, you’ll probably see minimal impact to your score when closing an account.

By the way, an account in good standing with a history of on-time payments will remain in your credit files for up to 10 years from the date it was closed.

5. Fact: Updating your income doesn’t negatively impact your credit score.

Although a lender will use income to grant credit, your earnings are not a factor in determining your credit score.

So, you don’t have to be concerned about providing updates about your income.

B.O.M. — The best of Michelle Singletary on personal finance

If you have a personal finance question for Washington Post columnist Michelle Singletary, please call 1-855-ASK-POST (1-855-275-7678).

Recession-proof your life: The tsunami of economic news is leading consumers, investors and would-be homeowners alike to ask whether a recession is inevitable. Regardless of the answer, there are practical steps you can take to help shield yourself from a worst-case scenario.

Credit card debt: Carrying credit card debt is never good and you should ditch the habit. Here are seven ways to lower your credit card debt in light of the Fed continuing to raise interest rates.

Money moves for life: For a more sweeping overview of Michelle’s timeless money advice, see Michelle Singletary’s Money Milestones. The interactive package offers guidance for every life stage, whether you’re just starting out in your career to living an abundant life in retirement.

Test Yourself: Do you know where you stand financially? Take our quiz and read advice from Michelle.

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