The last couple of years have been very much framed by fact-checking: whether it be in terms of what politicians say they have or haven’t done, or the science of virus transmission, social media in particular has been held to account for spreading misinformation.

Sadly, it seems, misinformation about personal finances – and credit scores in particular – still runs rife. It’s not just social media, mind, it’s a common misconception and the kind of thing that’s easily bandied around on WhatsApp groups and at the bar over a pint.

Here are three myths it’s time to kick from the group and get barred from our preferred watering hole.

1) Carrying A Balance Helps Your Credit Score

So, you pay for the family to go to the cinema on your credit card, and it costs you £100. When your statement comes through, you sensibly avoid paying only the minimum, but you don’t clear it in full. You pay off, say, £85, because you think it’ll be good for your credit score.

No. It’s not.

The only people it’s good for are the credit card companies who charge you interest. That might not sound like a lot on £15, but if you add that up over the course of the year that’s a hefty chunk of change you’re throwing away for no actual benefit. It’s also important to remember that interest is charged on the average balance, not the actual one. You’re not paying interest on £15, you’ll be paying it on the full £100, as that’s what sat on your balance sheet for longer.

Not only that, but the more you do that, the more you build up your credit utilisation (also known as your credit utilisation ratio) which forms a significant part of your credit score. The rule of thumb with credit utilisation is to keep it as low as possible. Under 30% is good, under 10% is better, but zero is best.

In short, pay your balance in full. Your wallet will thank you for it, and your credit score will be just fine.

2) Credit Checks Don’t Affect Your Score

We have to be careful with this one because it depends on who’s doing the checking. It’s the other side of the coin for the myth that “checking my credit score will hurt it”.

Let’s be clear: if you check your own credit score, it will not affect it. Using a service such as Clearscore or any of the others from the big credit reference agencies to see your borrowing power makes good financial sense. It’s sensible. It’s good money management, so no, it doesn’t affect your score if you check it yourself.

What DOES affect your credit score is when another company does it as part of a formal application. This is why they have to tell you that they need to do it and ask your permission to go ahead. They have to ask because they know it will affect your credit score and everything that it entails.

What we’re looking at here is the difference between a soft search (when you check your own score or use an eligibility checker on a financial website), and a hard search (when you’ve applied for credit such as a credit card or loan, saying “yes, I would like to apply for this product, please”).

Soft searches appear on your credit report so you can see a history of enquiries, but they don’t affect it. Hard searches also appear, but they’re also a message to other lenders to say “this person has recently applied for credit with our company”.

If you’re a lender and see that someone has been asking for money from lots of different companies you might think twice about accepting their application – it looks like they might be a little desperate for cash. That doesn’t mean they are, just how they appear to be, so a lot of applications (and the associated hard searches) can most definitely bring your score down.

Of course, different products have different impacts. When you’re searching for a mortgage, personal loan, or a loan for a car, for example, you might want to shop around and you may end up making several applications. The agencies recognise this and won’t penalise you for trying to get the best deal. You’re usually pretty safe if you make all your applications within about two weeks, but it’s still best to keep them to a minimum if you can.

Credit cards, on the other hand, are not something you “shop around” for in the same way, so every application is classed as a hard search. That’s one reason why eligibility checkers have become so popular on finance websites as they only perform a soft search. This allows them to give you a reasonable idea of whether or not you’ll be accepted without damaging your credit score.

The point loss on your score is fairly light – just a handful of points – and usually rebounds within a month or two once you start making repayments. The real damage is if you make lots of applications for lots of products within a few months. Don’t forget – even if your application is rejected, the search will still appear on your report.

Download our comprehensive, free ebook for everything you need to know credit scores

3) Closing Unused Credit Cards Is Good For Your Credit Score

Ironically, closing a credit card you don’t use will usually harm your credit score – at least for a little while – even if it works out better for your overall finances in the long term.

Why? Because the simple fact you have that credit card affects your score in terms of your credit utilisation – which accounts for 35% of it – and it will also affect the average age of your accounts.

In an extreme example, let’s say you have two credit cards with a limit of £1,000 each. You’ve spent £600 on one card and nothing on the other. Your credit utilisation in this scenario is around 30% and is a perfectly decent situation to be in as far as your credit score is concerned.

You decide to close the card you haven’t spent any money on, meaning that the £600 balance isn’t coming out of an available £2000, but out of £1000. This puts your credit utilisation at 60% and is definitely a spot where lenders will mark you down as you look too reliant on credit.

How credit utilisation can affect your credit score: a real world example

Lenders also like to see a long, stable credit history, so they take an average age of all your accounts. Let’s say you’ve had one card for 16 years and the other for 2 years, you have an average credit age of 9 years. If it’s the older card you’re closing, that age too will drop to just two years.

Now the age of your accounts isn’t the most significant factor when it comes to calculating your credit score, but it does play a role, and those few points could mean the difference between getting a mortgage and being rejected, or the difference between getting a good rate or a not-so-good one, potentially costing you thousands in the long run.

Unless you are paying an annual fee on the card that you’re not using, there’s no real need to close that account – just spend something on it once in a while (and then repay it!) to keep it active. If a fee is the only reason you want to close the account, you could also consider asking your credit card company to transfer you to a non-fee-based alternative. You might not get the perks of the fee-paying version, but if you’re not spending, you’re not getting them anyway!

Just A Quick Word On Credit Scores

It is customary to talk about your credit score however, it should be more accurately described as your credit scores. Whilst that doesn’t change the impact of a poor score on a specific credit application, it does mean that all might not be lost... If this concept is new to you then please read on.

Credit scores are compiled by the three UK credit reference agencies namely, Experian, Equifax and TransUnion. The agencies generate their own score for you from the information they hold in your credit file. Although the credit reference agencies purport to update your credit file on a regular basis, this just may not be the case. Also, they are not infallible and may hold outdated and incorrect information within your credit file. As the credit reference agencies provide their information to lenders it is important you check your credit file and credit score, not with just one agency but with all three. Why is this so important, because different lenders may rely upon different credit reference agencies and may not have up to date information about you. For example, lender A may get your credit score from TransUnion and Lender B may get your credit score from Experian. Depending on what information either of those credit reference agencies hold on your credit file may mean your loan application is rejected by lender A but accepted by lender B.

Two things here are very important, the first is that you contact all three credit reference agencies and find out what information they hold on your credit file and if it is up to-date and accurate. Second, ask your proposed lender which credit reference agency they will use to obtain your credit score.

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The world of personal finance can be a maze, and navigating it without the right information can be a nightmare.

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