How to build your credit score — and how NOT to


Having a great score is up there with having a day-to-day budget, long-term savings goals and retirement plan — it's a pretty important part of your finances. After all, those three digits could determine your qualification for everything from cards to loans and even apartments. In a recent study from Capital One, some 86% of Americans surveyed said they want to increase their score, and nine out of ten millennials even said they'd choose excellent credit over never having access to social media. (Insert tired cliché about how those lovable millennials can't live without their social media.)

While you may have good intentions for nailing a top score, figuring out the nuances of what helps and hurts your score can be tricky. And nuances can be important. Even just a 20-or-so point difference in your score could mean major savings, since a better credit score could significantly affect your interest rate on loans.

The Capital One Credit Confidence Study found that many myths persist about what does and doesn't improve your score. So make sure you're not falling for these five common misconceptions.

Myth #1: Paying your cell phone bill on time can boost your score.


This one is especially pervasive among millennials: 56% of 18-24 year olds surveyed thought it was true. 

Reality: You know that on-time payments are a key way to build your credit score — so shouldn't paying a cell phone bill count? Not quite. Credit scores are based on the information in your credit reports, which are primarily compiled by three major credit-reporting agencies — Equifax, Experian and TransUnion. But cell providers don't generally report on-time payments to the credit bureaus. That's because your credit report is chiefly intended to be a record of how you've repaid money that you've borrowed, and you're not borrowing anything from the cell phone company (same goes for the utility providers behind your electric and gas bills).

Do this instead: We still recommend paying all bills on time, especially utilities. Some utility companies even run a credit check, so having a good score is important. But ... while timely cell phone payments may not help build your score, successive late payments could hurt it if your provider has to call in a collections agency. Diligently paying any kind of loan, such as a student loan, auto loans and credit cards, will help build your score. If you have trouble keeping track of due dates, sign up for automated bill payments with your bank.

Myth #2: You only have one credit score.


Nearly a third of those who responded to Capital One's study got this question wrong.

Reality: You have dozens of possible scores at any moment in time. Really. The firms that create credit scores crunch the raw data on your credit report using a variety of formulas, some of which are targeted towards certain types of lenders or businesses. The end result? A whole lot of three-digit scores, all for lucky you.

Do this instead: Know what lenders want. Since credit scores are based on generally the same data, all your various scores are likely pretty similar. The most commonly used scores have a range of 300 to 850: in general, a score over 760 is considered excellent. The good news? The same healthy credit behaviors, like paying on time, can help improve all your scores across the board.  

Myth #3: Closing old card accounts can help you build credit.


About a third of folks in the Capital One study fell for this falsehood.

Reality: Closing an old account can actually ding your score in two ways. One, it could shorten the length of your credit history. Two, it could increase the ratio of your debt to your credit limit (known as your utilization ratio), and the lower that ratio, the better.

Do this instead: If you feel you need to close an account — say, because you're having trouble keeping track of your cards, or you're buckling under the temptation to overspend — choose one that you opened recently. You can also use the simulator feature on Capitol One's free CreditWise® app to calculate how closing one or another account will impact your score before you make a decision.

Myth #4: Keeping a balance on your credit cards will improve your credit.


Reality: As long as you make regular payments on time, keeping a low balance (typically below 30% of your overall limit) shouldn't impact your score. Just keep in mind that racking up a high balance in relation to your credit limit can throw off your utilization ratio, which is one of several factors that make up your score.

Do this instead: Use your cards — but stay within your means. Credit scoring models give the most points to those who use credit responsibly, which means showing some activity on your cards isn't necessarily a bad thing. You can totally reap the benefits of a cash back or rewards card — just be sure to make at least your minimum payment every month. Of course, it's best to pay down the full amount due, or as close to the full amount as you can, rather than only the minimum. Just don't forget that failing to pay the minimum will compound that interest, may cause you to incur fees and can hurt your score by not paying on time.

Myth #5: Checking your credit report will hurt your score.


In the Capital One study, 28% of respondents agreed with this statement.

Reality: When a lender checks your report (known as a "hard inquiry"), it can cause your score to dip slightly on a temporary basis. But looking at your own reports (a "soft inquiry") has no impact.

What if you're shopping around in order to get a good deal on a loan? No worries — the scoring models typically don't penalize you for the short period of time that you receive several hard inquiries since that is a sign of someone shopping around and being a smart consumer. If your score does dip, it likely won't affect your score more than a single inquiry.

Do this instead: Not only can you feel free to check your credit scores and reports regularly, but you absolutely should — about one in five reports have errors, according to the Federal Trade Commission. You can check your credit score and a summary — for free — with Capitol One's CreditWise® app (and you don't even have to be a Capital One customer).