As a college student, understanding credit can be overwhelming, especially with so much misinformation circulating. It’s easy to fall into common misconceptions that can harm your financial future. In this guide, we’ll debunk some of the most persistent credit myths and help you build a clear, solid understanding of how to manage credit responsibly.
Myth 1: You Don’t Need to Worry About Credit Until After Graduation
Many students believe that credit is something they can worry about once they graduate, but building credit early is essential. The longer your credit history, the better, so starting while you’re still in school will benefit you later.
The Truth:
- Credit History Matters: Lenders and landlords look for a long and positive credit history, and it’s easier to establish this when you start early.
- Better Loan Options: Building credit during college will help you qualify for better student loan rates, credit cards, and even auto loans in the future.
- More Housing Opportunities: Many landlords require credit checks before renting apartments, and a good credit score will make this process smoother after graduation.
Myth 2: Checking Your Credit Hurts Your Score
One of the most pervasive myths is that checking your credit score will hurt your credit. This confusion likely stems from the difference between soft inquiries and hard inquiries. Only hard inquiries, like applying for a loan or credit card, can impact your score.
The Truth:
- Soft Inquiries Don’t Hurt: Checking your own credit score, whether through a free credit monitoring service or a bank, is considered a soft inquiry and does not affect your score.
- Hard Inquiries Can Lower Your Score: Hard inquiries, such as when you apply for a new credit card or loan, can lower your score slightly, but the impact is usually temporary and minimal.
- Monitor Regularly: You should check your credit regularly to stay informed about your financial health and catch any errors or fraud early.
Myth 3: Closing a Credit Card Will Improve Your Credit Score
Many people assume that closing a credit card they no longer use will help their credit score, but this can actually harm your credit in multiple ways. Closing an account reduces your available credit, which can increase your credit utilization ratio and shorten your credit history.
The Truth:
- Keep Old Accounts Open: Even if you’re not using a credit card, keeping the account open helps your credit score by contributing to the length of your credit history.
- Low Utilization is Key: Closing a card decreases your available credit, which can raise your utilization ratio—an important factor in your score. A lower utilization rate is better for your credit.
- Only Close High-Fee Cards: If the card has a high annual fee or no longer fits your needs, consider closing it carefully. Try to keep at least one or two older accounts open to maintain your credit length and utilization.
Myth 4: Debit Cards Help Build Credit
It’s a common misconception that using a debit card is similar to using a credit card when it comes to building credit. Unfortunately, debit card activity is not reported to credit bureaus and does nothing to improve your credit score.
The Truth:
- Credit Cards Build Credit: Only activity on credit products—like credit cards, student loans, or personal loans—affects your credit score. Using a credit card responsibly is key to building credit.
- Debit Cards Are Different: While debit cards are useful for managing your checking account, they don’t help you build credit since they’re not reported to credit bureaus.
- Use Credit Responsibly: To build credit, use a credit card for small purchases and pay off the balance in full each month. This shows lenders that you’re responsible with borrowed money.
Myth 5: You Should Avoid Credit Cards Altogether
Some students believe that using credit cards will automatically lead to debt, so they avoid them entirely. While it’s true that improper credit card use can lead to financial trouble, avoiding credit cards altogether means missing out on an important opportunity to build credit.
The Truth:
- Credit Cards Are Tools: When used responsibly, credit cards are a powerful tool for building credit. Avoiding them entirely means you won’t build the credit history you need for future loans and financial products.
- Small Purchases Matter: Use your credit card for small, manageable purchases like groceries or gas. Pay the balance off in full each month to avoid interest and fees.
- Start Small and Build: Begin with a student credit card or secured credit card and slowly build your credit by making timely payments and keeping your utilization low.
Myth 6: Having No Debt Means You’ll Have a High Credit Score
While it’s important to manage debt carefully, having no debt at all does not guarantee a high credit score. Credit scores are built on your ability to manage credit, not avoid it. Lenders want to see a history of responsible credit use before they extend large loans.
The Truth:
- Credit History is Key: If you’ve never taken out a loan or used a credit card, you won’t have any credit history for lenders to evaluate, which can make it difficult to get approved for larger loans in the future.
- Build Credit Slowly: Use credit cards or take out small loans to build credit. Paying off credit on time shows lenders that you can manage borrowed money responsibly.
- Balance Debt and Responsibility: It’s okay to carry small amounts of debt, as long as you’re paying it off in a timely manner and keeping your balances low relative to your credit limit.
Myth 7: One Missed Payment Won’t Hurt
Some students believe that missing a payment or being a few days late isn’t a big deal, but even one missed payment can have a significant negative impact on your credit score. Late payments are reported to the credit bureaus, and the longer the payment is overdue, the worse it becomes for your credit.
The Truth:
- Late Payments Hurt: Missing even one payment can lower your credit score by several points, and the longer the payment goes unpaid, the worse the impact.
- Stay On Top of Due Dates: Set up auto-pay or reminders to ensure you never miss a payment. Even if you can’t pay the full balance, make sure you pay at least the minimum amount on time.
- Communicate with Lenders: If you’re struggling to make payments, contact your lender to discuss options like deferment or setting up a payment plan.
Final Thoughts
Understanding how credit works and avoiding common myths can make all the difference in building a strong financial foundation during your college years. By using credit wisely, staying on top of payments, and monitoring your credit regularly, you can set yourself up for financial success well beyond graduation. Remember, building credit is a long-term process that requires patience, responsibility, and a solid understanding of how the system works.