You pay your bills on time and your credit score goes down – here are 3 myths that explain why

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You pay your bills on time and your credit score goes down – here are 3 myths that explain why

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Many people think they’ve cracked the credit game with a default payment. With every monthly balance cleared automatically, you can smooth your way to a higher score, right? Not really.

Getting a credit score is much less than that.

On-time payments and payment history are important, but not the whole story. At least seven other factors affect your FICO score, according to Experian (1), credit amounts account for 30%, length of credit history accounts for 15% and debt consolidation accounts for another 10%.

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Simply put, a flawless payment record can sit alongside a lower credit score if you don’t take care of other factors. This flawed structure of the credit scoring system has also created persistent myths that you need to understand.

With that in mind, here are three big myths that can catch even responsible borrowers off guard.

Myth 1: Clearing your balance keeps consumption low

Credit utilization is an important factor in your credit score. Average your credit card balance and available credit, so if you have a balance of $500 and available credit of $1,000, your utilization ratio is 50%.

Generally, lenders prefer a rate of less than 30%, according to Equifax (2). So monitoring this ratio and keeping it low is important if you are trying to increase your score.

Here’s the catch: Your card issuer reports your balance to the bureau on your statement closing date, not your due date, according to Experian (3). That means that even if you pay your bill in full every month, the reported balance could be hundreds or even thousands of dollars if you used it regularly every payment cycle.

You can deal with this by increasing your credit limit or paying off your balances early.

Myth 2: Hard inquiries are only for new credit cards

Most borrowers already know they can’t get a new credit card without a so-called “hard inquiry” on their file. These credit checks account for about 10% of your credit score, according to Experian.

What many borrowers don’t know is that tough questions can also be asked about applying for car loans, personal loans and cell phone plans, according to TransUnion (4).

Now, that doesn’t mean you should avoid all debt. In fact, opening new and different accounts expands your credit mix, which is another important part of your score. Also, other borrowing options can save you money.

For example, consolidating your various credit cards into one personal loan using Credible can help keep your debt burden manageable. Instead of alternating multiple monthly payments, you’ll have one predictable payment to manage each month.

With Credible’s online marketplace, finding the right loan becomes much easier. Credible allows you to compare-shop the lowest interest rates with just a few clicks.

A low interest rate may amount to a temporary ding in your credit score.

Read More: Robert Kiyosaki warned of ‘Greater Depression’ – with millions of Americans falling into poverty. Was he right?

Myth 3: Closing an old account cleans up your credit score

It makes sense to close an old, inactive credit account. In fact, this seemingly “smart” move can backfire.

Closing an older card lowers your credit history, which is responsible for about 15% of your overall credit score. With this in mind, keeping your old credit cards open and active can actually work in your favor and help you improve your score in the long run.

Bottom line: Paying your balance on time is important but not the whole story. If you’re trying to win the credit score game, you need to know all the rules – even the seemingly contradictory ones.