Busting 5 Common Credit Misconceptions

Profile photo of Joe Yerardi
Written by Joe Yerardi
Profile photo of Elizabeth Renter
Edited by Elizabeth Renter
Senior Economist
Fact Checked

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Maintaining solid credit can open doors to financial goals, but misunderstanding how credit works can make your efforts futile.

As part of the 2024 State of Consumer Credit study, a NerdWallet survey conducted online by The Harris Poll asked more than 2,000 adults a series of questions focusing on common misconceptions about credit.

Two thirds (67%) of Americans believed at least one of the five credit misconceptions we asked about. Here, we’re busting them.

1. Leaving a small balance on your credit card is not better for your credit scores than paying it off completely

Roughly a third (32%) of Americans wrongly believe that leaving a small balance on their credit card is better for their credit scores than paying it off completely each month, including about half (49%) of those who carry a balance on at least one card from month to month. But it’s not true.

The best way to build your credit scores is by paying off your card balances on time and in full each month.

This is true for a couple of reasons.

First, payment history has the biggest influence on credit scores. Lenders want to see that you consistently pay back money you’ve borrowed. So you want to make sure you never miss a payment.

Second, credit utilization — the portion of available credit you use — is the next biggest factor in determining your credit scores. Aim to keep your credit utilization below 30%. By paying your credit card bill in full, you’ll prevent your credit utilization from creeping up and dragging down your credit scores.

Avoiding leaving a balance on your card will also mean you won’t be paying interest on that balance. So you’ll be doing your bank account a favor, too.

2. Checking your credit scores does not cause them to go down

About a quarter (24%) of Americans wrongly believe that checking their credit score can cause it to go down.

Checking your credit scores won’t impact them.

It’s actually a good idea to regularly check your credit scores. Knowing where your scores stand will help you understand the sorts of credit you’d likely qualify for. Regularly checking your scores can also alert you to sudden drops that may be the result of errors on your credit reports or even identity theft. Regularly checking your credit reports is a good idea too; this is known as a “soft inquiry,” and similarly won’t impact your score.

Now while checking your own credit won’t cause it to go down, some types of credit inquiries can impact your scores, which leads us to …

3. Your credit scores can go down when a lender runs a 'credit check'

Nearly 1 in 5 (18%) of Americans wrongly believe your credit scores cannot go down when a lender runs a “credit check.”

In reality, there are many reasons your score might drop, and one of them is a lender running a “hard inquiry” on your credit to determine approval for a loan or credit card, something it can do only with your consent.

The good news is your scores are likely to drop by only a few points and the drop should last less than a year, though the inquiry does stay on your credit reports for two years.

Because these sorts of credit checks will temporarily bring your credit scores down, it’s usually a good idea to space out applications for credit cards by about six months.

The situation is a bit different if you’re shopping for loans. Scoring companies such as FICO and VantageScore will group applications for loans together if made within a short period of time, with the exact time span varying by score model. So it’s a good idea to do your rate shopping quickly if applying for a mortgage or auto loan.

4. People with bad credit can be approved for credit cards

One in five (20%) Americans wrongly believe you can’t be approved for credit cards if you have bad credit.

The truth is many lenders offer cards tailored for people with bad credit scores (generally considered a score below 630 on the 300-850 scale).

People who want to work on their credit can consider applying for one of these cards when they're prepared to demonstrate responsible credit use, including on-time payments and paying off the balance in full each period.

These cards often come in the form of secured credit cards. Such cards require a security deposit upfront that’ll be returned to you when you close or upgrade the card.

Some retailers offer store-branded cards that are easier to qualify for than other credit cards. A downside of many of these cards is that they can be used only at that particular retailer. However, some retailers do issue store-branded cards that can be used anywhere traditional credit cards are accepted.

Some lenders offer unsecured cards to people with bad credit. These don’t require a deposit but often have high fees and interest that can end up costing you more than the security deposit on a secured card. For credit building, secured cards are generally a safer choice.

5. Using buy now, pay later isn’t likely to help your credit scores

Nearly a third (31%) of Americans wrongly believe that using buy now, pay later (BNPL) services can better your credit score.

BNPL services are a type of loan that lets you split payment for purchases into multiple equal installments. The most popular BNPL services tend to break the payment up into four installments, with a payment due every two weeks. Unlike other installment loans like mortgages or auto loans, BNPL loans with these shorter repayment periods usually don’t charge interest (though those with longer repayment periods often will). BNPL plans do charge fees for late or missed payments.

Buy now, pay later payment plans usually don’t report to credit bureaus. However, the BNPL industry is still evolving. In most cases, paying back the loans on time won’t help your credit score. Some shoppers might be better off using credit cards, which do report payment history. Be sure to pay off the card’s balance in full each month to avoid late fees and interest.

The complete survey methodology is available in the 2024 State of Consumer Credit Report, published at NerdWallet.