When it comes to credit cards, it’s not hard to find bad advice. Whether the wrong information comes from a well-meaning friend or a professional who isn’t up to date, it could cost you money and hurt your credit score if you follow it. So, it’s important to learn how to use credit cards in a responsible way to improve your credit score, and know the credit card myths, so as to avoid them.
As someone who knows a lot about credit, I’ve heard almost every credit card myth there is. Here are twelve of the most common credit card myths that I have heard over and over again. If you consider these myths, you’ll learn how to both build credit and raise your credit score.
Your credit card may be your preferred way to pay bills and other expenses, big and small, but do you know how it affects your credit scores?
Due to the numerous credit card myths, you may be making mistakes without realizing it, and these can hurt your financial life.
The Top Twelve Credit Card Myths And The Truth About Them
Having a balance improves your credit score.
Contrary to what most people think, it is not good to have a balance on your credit card. If you let a balance from the previous month carry over, you’ll have to pay interest on it. It won’t help you build credit or get you extra points with the credit bureaus.
Your credit-utilization ratio is better if you have a low balance or none at all. At any given time, that is how much of your available credit you are using. This credit-utilization rate is a big part of your credit score, and it’s usually best to keep it below 30%. In other words, it’s best to use no more than 30% of your total credit limit across all of your accounts with revolving credit. When cardholders pay off their balances every month, they pay less in interest and use less of their credit.
Increasing your credit limit can be a trap.
The second of the credit card myths to be debunked is the credit limit trap. When a credit card issuer gives you a raise, they make more money from the extra interest. This is true, though, only if you use the credit. People who tend to max out their credit cards are the ones who get in trouble when their credit limits go up. If you accept the increase but keep spending and payments the same, it won’t hurt your credit or your wallet. The lower debt-to-credit ratio can also help your credit score.
If you ask for a raise, it will show up on your credit report as a credit inquiry. If the increase is automatic, nothing changes on your credit report.
Credit card use leads to debt
If you use your card, you will get into debt quickly. When you use a credit card, you are borrowing money. But you won’t get into credit card debt if you pay off your balance every month. You’ll only start to build up debt that could hurt your credit score if you don’t pay off the balance and maybe only make the minimum payments.
Credit card myths: Interest is due right away after a purchase.
The truth is that this is a common myth about credit cards, and if you want to get the most out of your card, you need to know this. Interest doesn’t start to add up until the day after your payment is due. If you pay off your whole balance by the due date, you won’t have to pay any interest. This turns your credit card into a way to borrow money, which, if used wisely, can help you manage your cash flow.
This doesn’t apply to cash withdrawals, though, because interest is usually charged right away in those cases.
Some cards also offer 0% interest on purchases for a certain amount of time. However, the interest-free period starts when you open the card, not when you use it for the first time. After that time, if you haven’t paid off the whole balance, interest will be added every day. And the same is true if you carry a balance from one statement to the next, which is called “revolving a balance”: there is no interest-free period for your next purchases. That interest is due right away is one of the credit card myths you should avoid.
Your credit score is affected by how many cards you have.
Many people also think that having a wallet full of credit cards makes you look good but hurts your ability to get credit in the future. This isn’t exactly true. If you pay your bills on time, having more than one credit card can actually be a smart financial move.
The key is to make sure that your different cards meet your different needs and that you use the rewards and other incentives that have been given to you. For instance, you could take advantage of a 0% balance transfer offer to clear off an existing debt with one card, get another card with a cashback or rewards incentive for everyday purchases, and a third card with a fixed-term 0% spending deal for a big one-time purchase like a vacation or home improvements.
Just make sure to keep up with payments and keep a close eye on when interest-free periods end. If you only use one card for everyday purchases, paying off the full balance every month will keep you from getting into debt and show that you know how to handle your credit well.
Lending institutions do like to see responsible long-term agreements, so it’s a good idea to keep an account that’s been open for a long time active.
Credit card myths: Your score goes up when you get rid of old cards.
People like to think of a national credit blacklist that marks you as a bad borrower for life once you’re on it. This is not true at all; each lender gives you a different score. There are many different ways to figure out your credit score, and closing old cards doesn’t always help. It depends on your own situation, but accounts that have been open for a long time and have a good history can help your score. Closing an old card can actually lower your available credit, which means more of your available credit is being used, which could hurt your score.
Also, a big part of your credit score is based on trying to guess how you will act in the future. A bad credit history will always work against you, but if you don’t have much credit history at all, lenders will see you as an unknown person who could be a risk.
Your credit score won’t change if you reach your credit limit.
Even if you pay off your card in full every month, maxing it out shows lenders that you depend too much on credit. It could mean that you’re a risk to a lender.
This will show up on your credit report, which can lower your credit score. The solution is to keep a perfect credit utilization ratio, which is the ratio of how much credit you use to how much credit you have available. Both credit bureaus and lenders keep track of this.
A rule of thumb that is often used is 30 percent. So, if your credit limit is $1,000, this means that you use $333 of it.
Co-signing a credit card doesn’t change your credit score in any way.
When you cosign for a credit card, you are just as responsible for your credit score as the person who actually uses the card, even if you never charge anything on it. If the cardholder spends too much or doesn’t pay on time, it will hurt your credit score as well.
Only cosign for someone you trust, and make sure they know what good credit behavior looks like. The safest thing to do is never co-sign anything.
If you know the truth about your credit scores and how you use your credit cards, you can only improve them. This is true whether your scores are already high or on the low end.
Credit card myths: If you miss one payment, your credit score goes down.
Even though it’s always best to pay on time, sometimes you just can’t. Some lenders won’t tell the credit bureaus about just one late credit card payment, and if they do, they usually wait 30 or 60 days before doing so. If you’re late on a payment, call your lender straight away, explain why you missed the payment, and make plans to pay over the phone. You might have to pay a late payment fee, but if it’s your first missed payment or the first one in a while, lenders are usually understanding. Ask if the late fee can be skipped. You might be happy with what you find out.
A few late payments won’t hurt your credit score.
If you miss more than one payment, you might not be able to just call the lender and explain what happened. You could get charged more late fees, and the lender could even raise your interest rate to the default APR, which is usually much higher than your standard APR. If you’re late on payments more than once, it’s likely that the credit reporting agencies will find out, which could hurt your credit score. If you find yourself in this situation, call the lender right away and ask what you can do to get out of it.
Credit Card Myths: Don’t get a new card until you’ve paid off an old one.
If you close a card after paying off the balance, it could reduce the amount of credit you can use. In turn, that would hurt how you use your credit. It could also affect other parts of your credit score, like the types of credit you have and how long you’ve had credit. Before you close an account, you should think about how long you’ve had it and how much of your credit it represents.
It’s fine to make the minimum payment.
From a technical point of view, there’s nothing wrong with making just the minimum payment. But the minimum payment is usually a small amount compared to your balance. It may not even be enough to cover the interest charges. If you pay $100 a month on your credit card but pay $90 in interest, you’re only putting $10 a month toward your balance. If you only make the minimum payments, it could take years to pay off a big balance, and the interest you pay will be much more than the principal. So, if you can, try to pay more than the minimum payment each month. In the long run, this will save you money.
There you go, which credit card myths was messing you up? Share with us in the comment section below.
