8 Common Credit Myths Debunked

NEW YORK (MainStreet) -- Credit may be a big part of most consumers' lives, but that doesn't mean everyone fully understands the industry.

"For many people, credit is a weird thing," says Todd Albery, CEO of credit education site Quizzle.com. He believes many consumers are intimidated by the notion that there is a "secret system used to generate a score that follows you all over the place."

Credit may be a big part of most consumers' lives, but that doesn't mean everyone fully understands the industry.

In an attempt to help you become more credit savvy in 2012, we spoke to experts to clear up some common misconceptions about credit cards and credit scores.

Myth 1: Paying on time guarantees a good score
Paying your bills on time is an important component to your credit score, but it's not a surefire way to a perfect score, especially if you're prone to bumping up against your credit limits before making a payment.

In addition to payment history, "credit bureaus see the balance on your last statement," says Adrian Nazari, CEO of Credit Sesame. If this balance is extremely high, it can negatively affect your credit utilization ratio - the amount of credit you are using versus the amount of credit you have available to you - and can cost you some points in that category.

This is why it's a good idea to "pay [your issuer] a few days ahead of your credit card statement date," Nazari says, which will ensure a low balance gets reported to the bureaus each month.

Myth 2: Carrying a balance helps build credit
The credit bureaus are privy to your payment history and the balance on your monthly credit card bill, "but they don't know if you're paying interest or not," Nazari says. This means deciding to pay the minimum each month isn't going to do much more than cost you money, especially if you're carrying a particularly high annual percentage rate. The lesson? Don't forgo payments just to carry a balance month to month.