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Most people think they’ve beat the credit score game with autopay. With each monthly balance that is automatically settled, you can slide towards a high score, right? Not precisely.
Credit scoring is a little more nuanced than that.
On-time payments and payment history are important, but they are not the whole story. According to Experian (1), at least seven other factors affect your FICO score: amounts owed account for 30%, length of credit history accounts for 15%, and credit mix accounts for another 10%.
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Simply put, a spotless payment history can be accompanied by a drop in credit score if other factors are not managed. This nuanced structure of the credit scoring system has also created some persistent myths that need to be understood.
With this 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 to available credit, so if you have a balance of $500 and available credit of $1,000, your utilization rate is 50%.
According to Equifax (2), lenders typically prefer a ratio below 30%. Therefore, monitoring this ratio and keeping it low is essential if you are trying to maximize your score.
Here’s the catch: Your card issuer reports your balance to the bureaus on your statement closing date, not the payment due date, according to Experian (3). That means that even if you pay your bill in full every month, the reported balance could be hundreds or thousands of dollars if you’ve been spending normally throughout the billing cycle.
You can address this by increasing your credit limit or paying off your balances early.
Myth 2: Hard inquiries are only for new credit cards
Most borrowers already know that they can’t get a new credit card without a “thorough investigation” into their file. These credit checks make up about 10% of your credit score, according to Experian.
What many borrowers probably don’t know is that, according to TransUnion (4), difficult questions also arise when applying for an auto loan, a personal loan, and even some cell phone plans.