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Most people think they’ve cracked the credit score game with autopay. With every monthly balance getting cleared automatically, you can glide your way to a high score, right? Not really.
Credit scoring is a little more nuanced than that.
On-time payments and payment history are important, but they are not the full story. At least seven other factors impact your FICO score, according to Experian (1), with amounts owed accounting for 30%, length of credit history accounting for 15% and credit mix for another 10%.
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Simply put, a flawless track record of payments can sit alongside a dropping credit score if you don’t manage the other factors. This nuanced structure of the credit scoring system has also created some persistent myths that you need to understand.
With that in mind, here are three of the biggest myths that can trap even the most responsible borrowers.
Myth 1: Clearing your balance keeps utilization low
Credit utilization is an essential factor in your credit score. It’s a ratio of 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 ratio below 30%, according to Equifax (2). So monitoring this ratio and keeping it low is critical if you’re trying to maximize your score.
Here’s the trap: Your card issuer reports your balance to the bureaus on your statement closing date, not your payment due date, as per Experian (3). That means even if you pay your bill in full every month, the balance reported could be hundreds or thousands of dollars if you’ve been spending normally throughout the billing cycle.
You can tackle this by raising 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 roughly 10% of your credit score, according to Experian.
What many borrowers probably don’t know is that hard inquiries also get triggered by applying for a car loan, taking out a personal loan and even some cell phone plans, according to TransUnion (4).
