Image: Woman with credit cards © Corbis

More than a decade has passed since the vault cracked open and we started learning how credit scores really work.

For years, the creators of the leading credit scoring formula, the FICO, didn't want consumers to know the scores existed, let alone what went into them. In early 2000, however, E-Loan started letting customers see their FICO scores. That free experiment was quickly shut down, but the secret was out.

Pressure from consumer advocates and lawmakers finally persuaded the FICO creators -- a company named Fair Isaac, now known simply as FICO -- to reveal later that year the 22 factors, grouped into five categories, that went into creating its scores.

We've been adding to our knowledge ever since. But all these years later I'm still hearing many of the stupid myths about credit and credit scoring that prevailed more than a decade ago, plus some that have sprung up since.

(This story was updated in April 2013. See"Don't fall for these 7 credit myths")

These myths aren't just annoying. Their prevalence is keeping people from understanding one of the most important numbers in their financial lives. Credit scores are used:

  • By lenders, to determine whether you're approved for loans or credit cards, along with the interest rates and terms you get.

    Liz Weston

    Liz Weston

  • By insurers, to set premiums.
  • By cell phone companies, to see who qualifies for a contract and who doesn't.
  • By utilities, to determine whether you need to leave a deposit and how much.
  • By landlords, to decide who gets apartments and rental houses.

Failing to understand credit scores and how they work, in other words, really can put a dent in your financial life.

Here are the seven most dangerous myths that need to be dispelled:

Myth No 1: "If you handle your finances responsibly, your credit scores will take care of themselves."

Fact: A credit score is not a financial-health score. It doesn't measure your income, assets or financial savvy. There are some behaviors that may be good for your wallet that aren't good for your scores.

Keep in mind that credit scoring formulas have one primary purpose: to help lenders gauge the likelihood you'll default, based on how you handle credit. If you stop using credit or use it in a way the formulas don't like -- using only one card, shutting down a bunch of accounts or maxing out your cards, even if you then pay them off in full -- your scores could suffer.

Myth No. 2: "Checking your credit hurts your credit scores."

Fact: Checking your own credit reports and scores does not affect your scores. Period.

A credit check could hurt you if you asked a friend at a bank or car dealership to pull your credit reports. Such transactions probably would be coded as "hard" inquiries, or as applications for credit, which could ding your scores.

But checking your own credit is otherwise a non-event.

This persistent myth is particularly destructive, because it discourages people from knowing what's going on with their credit reports and scores. Many reports contain serious errors that result in your being turned down for a loan or paying a much higher interest rate than you deserve. You need to visit at least once a year to view your free credit reports from the three bureaus and dispute any serious errors. If you'll be in the market for a major loan, such as a mortgage or an auto loan, you'd be smart to buy your FICO scores from to see how lenders are likely to view your application and get tips from improving your numbers.

Myth No. 3: "Asking for lower limits will help your credit."

Fact: Having sizable credit limits is a good thing for your scores, as long as you don't use them to run up debt.

Lenders like to see a big gap between your available limits and the amount of credit you're actually using. A lower limit reduces that gap, which can be bad news for your credit scores.

Of course, if you can't trust yourself not to use your available credit, the damage to your credit scores may be the least of your worries. Otherwise, though, you probably should leave your credit limits alone.

Myth No. 4: "You need to carry a credit card balance to have good scores."

Fact: You don't need to be in debt or pay a penny of interest to have good credit scores.

Your credit reports and scores don't "know" whether you're carrying a balance or paying it off in full every month. That's because the balance reported to the credit bureaus typically is the balance from your last statement, not what was left over after you got that statement and paid the bill. So you might as well pay in full and save yourself the interest.

This myth encourages people to carry unnecessary debt, putting them at the mercy of credit card issuers and eroding their financial security.