5 Common Credit Myths



Five common “myth-stakes” that could hurt your credit score

Your credit score helps lenders decide how likely you are to repay a loan, but there are many stubborn myths about the best way to build credit that you’ll kick yourself for believing. With the help of Stacy Yanchuk Oleksy from the Credit Counselling Society, let’s make sure you avoid making these five common “myth-stakes” if you’re looking for ways to improve credit.

Myth #1. “I need lots of credit cards to build my credit.”

The more credit cards you have, the more tempting it is to use them all, which can increase your risk, as well as the lender’s risk. Yanchuk Oleksy advises Canadians to have one credit card, or possibly two. Your credit score is partly determined by the different types of credit you have. Credit bureaus like TransUnion look more favourably upon clients with a mixture, such as credit cards, retail accounts, mortgage loans and installment loans.

Myth #2.  “I need high limits to build good credit.”

Nope, not true at all. Yanchuk Oleksy says a lot of Canadians are under the impression that high limits on a completely unused credit card can serve two purposes:

  • First, they think it looks impressive, and will show potential lenders that you’re a good risk;
  • Second, the unused card is always there for a rainy day during a personal financial crisis.

The truth is, however, that having a high limit on an unused card can work against you because that card has no history of you borrowing and paying back money, which is an important factor that affects your credit score. Yanchuk Oleksy suggests using an emergency savings account with actual money in it as a better plan.

Myth #3. “If I max out my credit card and then pay it off each month, that builds credit.”

It might be better to hold off on the monthly buying spree idea as the best way to build credit. It actually hurts your credit score if you hit the limit every month, even though you’re careful to pay it off. Typically, your credit score is better when you keep your balance below 30% of your credit limit (i.e. your “credit utilization ratio”) and then pay it off every month. For example, if you have a card with a $1,000 limit, it’s best to keep your balance at $300 or less.

Myth #4.  Buy something, go home, and pay it off immediately to build credit.

While buying and paying off immediately sounds like it makes solid credit sense, it’s actually the biggest myth out there, according to Yanchuk Oleksy. Follow these steps as ways to build credit:

  1. Make a purchase
  2. Wait until it shows up as a bill (online statement or paper statement)
  3. Pay it off before it’s past due

The benefits of doing things in proper order are that it builds credit, and results in no interest being charged.

Myth #5.  A credit report and credit score are the same thing.

No, they are quite different.  Here’s an easy way to keep it straight:

Credit Report

  • A credit report looks into the past
  • It’s kind of like your resume: it details your history
  • Contains a lot of information: personal info, public records, credit limits, balances, transactions, etc.

Credit Score

  • It is used to predict your credit future
  • A credit score is a three-digit number
  • Lenders can use it for fast information to help decide whether you’re a good risk for receiving a loan

The key to busting myths about credit is knowledge. Don’t assume things, check them out. Click here to learn the five ways to build a good credit score.

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