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Man paying with credit card reader in shop
Man paying with credit card reader in shop
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America is a nation that runs on credit.

According to ValuePenguin, total outstanding U.S. consumer debt as of May 2016 was $3.4 trillion, including $929 billion in revolving debt. Some 38% of all American households are currently carrying a balance on their credit cards, with the average balance-carrying household toting around more than $16,000 in debt. Comparably, this is up about 10% from 2013.

Should any of these figures be surprising? Not particularly when approximately 70% of U.S. GDP is based on consumption. We're a "buy first, ask questions later" society.

What's far more shocking than this debt data is just how little the American public knows about credit and credit scores despite racking up $3.4 trillion in debt. A number of credit score myths exist that could completely wreck your finances and credit score if you aren't careful. Here are, in no particular order, 11 of the worst credit score myths.

1. I don't need credit -- I'll just use prepaid and debit cards

Though it's true that sticking with debit cards and prepaid cards will ensure you won't dig yourself into a debt hole, living your life without establishing credit could mean bad news elsewhere.

You're probably well aware that credit scores are used when determining whether or not you qualify for a mortgage or auto loan, but did you know that landlords often access your credit score when you're looking to rent, and employers sometimes want access to your credit report before hiring you? If you have no credit history, it could cost you the apartment or job you want. Furthermore, insurers occasionally examine your credit history, too, as studies have shown that people with poor credit tend to be costlier to insure.

2. I have to carry a balance on my credit card to improve my score

This is perhaps the greatest credit card misconception of them all -- that you'll need to carry a balance on your credit card to establish a good credit score. It's 100% false.

According to, which did its best to make sense of how FICO calculates credit scores, 35% of your score is based on your payment history; 30% for credit utilization; 15% for length of credit history; 10% for new credit accounts; and 10% for credit mix. Nowhere in there does it say you'd need to carry a balance. Instead, making your payments on time and avoiding charging too much on your credit cards relative to your available credit limit is the best recipe to improve your score.

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3. One credit card is all I need

Though it might be tempting to open just a single credit card account and use that card for everything, credit agencies aren't going to be thrilled, even if the account is kept in excellent standing.

As noted above, FICO pays attention to your credit card mix when calculating your score, and even lenders want to see that you can handle repaying a variety of accounts, such as a mortgage, auto loan, revolving credit card, and perhaps department store card. If you have just one account open, even if it's in good standing, lenders may view you as a risk and offer you a higher interest rate.

4. All credit scores are the same

You might be under the impression that all credit scores are the same, but that's just not the case.

There are actually three separate credit reporting bureaus -- Experian, TransUnion, and Equifax -- and it's really quite common for all three to have different scores for you. Credit bureaus, like FICO, are quite secretive about their credit score formulas, meaning a difference of a few points here and there should be expected. Further, there's no guarantee that your credit information is being reported to, or factored into, your credit score at each of the three bureaus.

5. Closing multiple accounts will help my credit score

If you have what you think is an abundance of credit accounts, you might be tempted to close them thinking that the credit bureaus will see you as more responsible. Unfortunately, closing accounts could come back to haunt you in two ways.

First and foremost, closing an account, or multiple accounts, means reducing your available credit. Per FICO, your credit utilization accounts for about 30% of your credit score. If you eliminate some of your available credit, then your debt-to-credit ratio will rise (assuming you're carrying a balance). Creditors typically don't like to see a consumer use more than 20% to 30% of their available credit; if you close too many accounts you may inadvertently hurt your score by going above this limit.

Secondly, closing old accounts could reduce your length of history, which is another factor FICO uses to determine your credit score. It's often in your best interest to keep your accounts open.

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6. Paying off a negative report makes it disappear

Let's be clear, paying off an account that's not in good standing (i.e., an account that's been sent to collections) is a good thing. However, paying off an account that's in bad standing doesn't mean it magically disappears overnight.

According to TransUnion, negative records, which include late payments and collection accounts, stay on your record for up to seven years from the date of the first delinquency. Paying off an account marked as "sent to collections" may help with lenders as it'll show your steadfastness in honoring your obligation to pay, but the negative affect on your score is liable to stick around for years.

7. Credit limit increases are bad news

If you've been a good customer and repaid your debts on time, chances are better than not that your lenders will offer to increase your line of credit, or simply do so without your request. Some people loathe the idea of credit limit increases and avoid them at all costs.

With the rare exception of the consumer who can't control their spending habits, credit limit increases should be welcomed, not avoided. Limit increases boost your available credit and thus lower your debt-to-credit ratio. Again, there's no figure written in stone here, but you generally want to avoid using more than 20% to 30% of your total available credit.

8. Co-signing has no real risks

If you have children with little credit history, or have friends or family members with little or poor credit history, you may be called upon to co-sign for a credit card, auto loan, or even their apartment. No big deal, right?

Wrong! Co-signing has real financial risks to you if the person you co-sign for doesn't make their payments on time, and they could include adverse effects on your credit score. According to TransUnion, the only way to end the dual liability of being a co-signer is to have one party refinance the loan, or persuade the creditor to formally take you off the account. In other words, think twice about co-signing for someone if you have a good credit score.

9. My income affects my credit score

A surprisingly common misconception that's existed for a while is that your income can affect your credit score. In other words, a higher income will allow you to achieve a better credit score.

The truth of the matter is that your income has absolutely nothing to do with your credit score. The five factors mentioned above from FICO are what it cares about when calculating your score. In addition, the Equal Credit Opportunity Act of 1976 ensures that creditors can't base their lending decisions on a borrower's race, religion, national origin, sex, marital status, or age -- so none of this information is used in the calculation of your credit score, either.

10. I shouldn't worry about my credit report since I'm not planning on opening new accounts

Another common theme is that consumers avoid checking their credit reports because they have no plans to open any additional accounts. This can be a bad idea.

Even if you're not planning on opening any new credit accounts, you should check your credit reports every year to ensure that there are no errors. According to a 2013 report from the Federal Trade Commission, 21% of American consumers had mistakes on their credit reports -- and if you aren't looking at your report each year, you could miss a potentially damaging mistake.

Best of all, consumers have free access to all three of their credit reports (one from each agency) once a year, so they have absolutely no excuse not to take a look.

11. I'll be penalized for checking my credit score

A final credit score myth is that you'll be penalized when you check your credit score.

The truth is that credit agencies differentiate what's known as "soft inquiries" from "hard inquiries". Soft inquiries, such as checking your credit score, won't change your credit score one way or the other. However, hard inquiries, which is where a lender delves into your credit history for the purpose of opening an account, do tend to knock a few points off of your score.

In other words, checking your score isn't an act that should be feared.

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Sean Williams has no material interest in any companies mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.