building and managing your creditFor those trying to get a handle on their credit, or for those just learning about credit, it can be hard to understand what credit is and how it works. This task is made even more difficult by persistent myths and falsehoods that tend to be perpetuated about credit. That’s why we’ve decided to separate credit fact from fiction by detailing some common untruths you might have encountered regarding building and managing your credit.

Common myths about building your credit

Knowing what affects your credit scores is extremely important if you want to maintain or improve your credit. While the items in this list might seem relevant to credit building (and they may have some impact on your ability to get credit — e.g., your income will impact a credit card application), for the most part they aren’t because they do not directly affect your credit scores or credit reports. Here are four common myths about building credit:

1. Your income shows up on your credit reports. It may come as a surprise, but income plays absolutely no role in the evaluation of your credit, given that credit bureaus do not report income on credit reports, which means this information also doesn’t impact credit scores. That said, it is important to note that income will affect your approval for items like credit cards and personal loans. Essentially, if you don’t make enough money in a year to afford timely payments, your credit scores alone cannot help you secure financing from a lender.

2. Employment status affects your credit scores. Despite the fact that aspects of your employment history, like previous jobs, hiring dates and the names of employers, can show up on some of your credit reports (e.g., employment information you include on a credit card application may appear on your credit reports), your current employment status itself is not explicitly stated on your credit reports. You should know, though, that even if these aspects of your employment are in some of your credit reports, they are not part of the formulas used to build credit scores.

3. Rent and utility payments impact credit. While it is true that continuous, timely payments on your credit accounts will build your credit, the same isn’t necessarily true for other types of accounts. Unless the payments are reported to creditors, monthly rent and utility payments don’t impact your ability to build credit. If you ever want to know whether or not your payment history is reported to the credit bureaus, you can contact your landlord and service providers.

4. All credit inquiries will hurt your score. While being denied for a credit card can have some impacts on your credit reports, occasionally resulting in a slight credit score decline, you should know that all credit inquiries are not created equal. While soft inquiries have no impact on your credit reports or scores, hard inquiries will appear on your credit reports and reflect your scores. This means that if you get preapproved for a loan, your credit scores and reports will not reflect it because it’s a soft inquiry. On the flip side, applying for a credit card requires a hard inquiry, so it will show up on your credit reports — that’s why we always say it’s important to know some things before you apply for a credit card.

Common myths about managing your credit

Like opposite sides of a coin, you’ll often find that the credit-building myths listed above tend to follow the credit management myths, including the four listed here:

1. Debit cards and prepaid cards can improve your credit. Some individuals are under the impression that the usage of any type of payment card will improve their credit. Unfortunately, this isn’t the case. While responsible use of a credit card or a secured card will improve your credit, use of these other cards, like a prepaid card or debit card, won’t. This is because, unlike credit cards, debit and prepaid cards utilize your own funds instead of money that is loaned to you by a lender.

2. Paying with cash can help you avoid bad credit. A few people believe that if they never acquire debt, and pay things exclusively with cash, they can never have bad credit. While this is true, it also means you won’t have good credit either. Without a credit history, it’s likely that no one will lend to you, as they’ll feel that they can’t predict how you’ll behave with other people’s money since you don’t have a documented track record of how you manage payments, which is essentially what a credit report is. Regardless of how true the intuition behind this practice is, the simple truth is that not all debt is bad. Furthermore, if you feel uncomfortable using credit, even infrequent usage of credit (e.g., buying your groceries every other month with a credit card) can go a long way toward building your credit score.

3. Once your credit score tanks, it can never recover. Discussion about credit tends to center around getting out of debt and maintaining a good credit score, rather than recovering from derogatory items that tarnish your credit. Thus, when some individuals are faced with defaults, bankruptcy or judgments for the first time, they might see these as irrevocable points of no return. While none of these derogatory marks are by any means good, they are all things which you can eventually recover from. Every type of credit blemish has a statute of limitations and, in the vast majority of cases, should leave your credit reports after seven years (note that the maximum it can be on there is 10 years). This means that with enough time and with good credit habits, like responsible use of a secured credit card, your credit scores can heal from anything.

4. Once you retire, you don’t need credit. This is one we’ve covered before. A lot of people think that once they’ve retired, paid off their homes and put their kids through school that they won’t need to borrow any longer. Even so, credit is a lifelong metric, with implications for many of the services and amenities that seniors might need to use. In any case, it helps to maintain a decent credit score for all of your life, even if you don’t intend to open new credit cards or loans.

Building and managing credit is important, which is why we’ve written extensively about both. Whether you’re trying to recover from a credit disaster or simply keep up your current credit scores, keep reading our credit monitoring blog to learn more about good credit habits.