Ask John: Credit Myths and the Reality

Hello John,

I heard that you can establish credit and increase your credit scores faster by leaving a small balance on your credit cards each month. Is that true?

Oh, boy. Someone is up to no good again. Every once in a while at AskJohn@credit.com I get a large volume of the same question in a very short period of time. That means that someone either sent out a newsletter or did an interview and made some sort of bold statement about how to improve your credit scores and, as the smart consumer that you are, you want to validate what you’ve just heard, read, or seen. 

Recently I got a large number of emails about two strategies that supposedly will improve your credit scores, specifically FICO credit scores. The problem is that they were both incorrect, which is why they are now on my master list of FICO score myths. The list keeps getting longer and longer.

They were…

Myth #1 – Opting out of prescreened credit offers will improve your FICO scores by 5 points.

Hypothesis – Opting out, which you can do for free at www.optoutprescreen.com, prevents the four credit reporting agencies (yes there are four, not three) from selling your information to credit card issuers and keeps inquiries off of your credit reports.

Perception – Fewer inquires equals higher credit scores.

Reality – Opting out does prevent the four credit reporting agencies from selling your name as part of pre-approved credit solicitations. But that's where the truth ends. The type of inquiry that is posted to your credit files when your name is sold to a credit card issuer (or any other lender) for the purposes of soliciting your business is of the “soft” variety and has no impact on your scores. You can read more about soft inquiries in this previous issue of Ask John.

So, sorry, you didn't just lead a lap and earn 5 bonus points (our NASCAR™ fans will get that)!

Myth #2 – By leaving a balance on your credit cards each month you establish credit faster than someone who pays their balances in full each month.

Hypothesis – I'm not exactly sure. It's such a silly myth that I can't even begin to speculate why people think this is true. Maybe the credit card issuers started this one in an effort to earn more interest income.

Perception – Maybe it's that having a balance equals experience and experience equals higher credit scores.

Reality – Remember, we're talking about the speed at which you establish credit being somehow tied to you revolving a balance each month versus not. This is simply not true and I'm not sure where in the world this came from. If you and I both opened a Discover credit card in December of 2007, in December of 2008 they will both be 12 months old, agreed? If I revolve a balance each month and you pay in full, in December of 2008 both cards will still both be 12 months old. So, sorry, you didn't just lead a lap and earn 5 bonus points (our NASCAR fans will get that)!

Where do these myths come from?

I've been around long enough to know that there is plenty of blame to go around here. I've seen incorrect credit reporting and scoring information show up in some of our nation's most reputable publications. I've also heard some doozies from mortgage lenders. And, of course, I've heard some off-the-wall myths from credit celebrities.

I don't know the origin of these two myths, but I will send a signed copy of my book, You're Nothing but a Number, to the first person that sends me a link to an article that refers to these myths as truths.

And, of course, if you have any comments, questions, other myths, or want to suggest a topic, please send me an email to AskJohn@credit.com. If I use your idea or respond to your question, I’ll also send you a signed copy of my book.

I don?t know the origin of these two myths, but I will send a signed copy of my book, You're Nothing but a Number, to the first person that sends me a link to an article that refers to these myths as truths.

And, of course, if you have any comments, questions, other myths, or want to suggest a topic, please send me an email to AskJohn@credit.com. If I use your idea or respond to your question, I’ll also send you a signed copy of my book.

If you have a question, comment or story idea for John, he can be reached at AskJohn@credit.com. 

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