Q&A: 3 Most Common Credit Questions

Question: What are the three most common credit questions?

Answer: It's a complex topic, so it's not surprising that there are some credit questions that get asked over and over. But there are three questions, in particular, that confuse consumers.

Question #1: Do I need to carry a balance to build a credit score?

It's actually a fairly widespread misconception, and if you believe this, it can be costly. If you're trying to build credit with a credit card, you do need to use your credit card. This means you should purchase items using your credit card, but you shouldn't have a balance during the month that exceeds 30 percent of your credit limit. Then when the bill comes, you should pay the balance in full so you don't pay any interest.

This is what is meant by "responsible use" when it comes to credit cards. Credit scoring does not give you any bonus points for carrying a balance. You do get credit for paying your bill on time, whether it's the total balance or the minimum payment. If you do carry a balance, the beneficiary is the credit card company. So you end up paying interest on your purchases without gaining any benefit from that at all.

Question #2: Does checking my credit report hurt my credit score

There are two types of inquiries: Hard inquiries and soft inquiries. Hard inquiries occur when you apply for credit and the lender "pulls" your credit report from a major credit bureau. The lender does a detailed review of your credit report to determine if your application for credit should be denied or accepted. A hard inquiry usually results in a ding to your credit score. It's possible that there could be no impact at all, but in general, expect it to lower your score between two and five points.

Soft inquiries occur when a lender looks at your credit report but not for the purpose of approving you for a loan or other type of credit. It's often related to marketing decisions. For instance, when you receive a credit card offer in the mail, it's because the credit card company did a soft inquiry on your credit report to see if you have the basic qualifications required for the card. The credit card company does not want to waste time sending an offer to someone who has little chance of being approved.

Another example of a soft inquiry is when you've applied for a job and your prospective employer want to take a quick look at your credit standing. Checking your own credit report is a soft inquiry. So you can feel free to check your reports without any worries about lowering your credit score. You can check your credit and score for free at LendingTree as often as you like.

Question #3: Will closing a credit card hurt my credit score?

It's possible that closing a credit card will hurt your credit score. The reason is that 30 percent of your FICO score is made up of your "credit utilization ratio." This is the amount of credit you've used compared to the amount of credit you have available. When you close a credit card account, you lose the amount of available credit for that card.

Some people thing the problem is due to the loss of history. But even after you close an account, it can take up to ten years for the closed account to fall off of your credit report. So your main concern needs to center on the amount of available credit you'll lose.

There are times when closing a credit card should be considered. For instance, if there's a high annual fee on a rewards card and your current lifestyle doesn't gel with the rewards offered. Or maybe you have a secured card and the issuer doesn't graduate cardholders to unsecured cards. But you've rebuilt your credit and you're now ready for an unsecured card, and you need to close the account to get your deposit back.

One way around this dilemma is to get approved for a new credit card with the same (or preferably, higher) credit limit before you close an account. This offsets the loss of available credit that happens when you close the account.

There are no stupid credit questions

You know what? If you are confused about a credit issue, then chances are that other consumers are, too. There really are no dumb credit questions. Credit can be tricky and unless your parents took the time to teach you the basics, it's easy to get into trouble, especially with credit cards. All of us at LendingTree want to help you understand credit and even use it to your benefit. So keep the credit questions coming!

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