Tag: Credit Card Myths

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5 Credit Card Myths Hurting Your Wallet and Credit Score

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Credit cards, like any financial product, seem to create a certain amount of anxiety for people. There are myths and rumors running rampant about how to spend on a card, when to pay it off and whether or not to even have one. Unfortunately, some of these credit card myths may be causing your wallet – and your credit score – more harm than good.

Here are five credit card myths we hope you’ll disregard next time you hear them.

1. Don’t get a credit card, just use prepaid or debit cards

Never drink one beer, you’ll just get incredibly sick.

That’s essentially what people are saying when they tell you not to get a credit card.

There is a common misconception that carrying a credit card will ultimately lead to damaging credit card debt. Sure, some people don’t understand how to handle credit cards – or have personality types (looking at you present hedonists), that result in maxing out any credit limit.

However, for the responsible individual, a credit card offers one of the easiest ways to establish and build credit history. Prepaid cards and debit cards do nothing to help establish credit history.

Instead of just listening to scare tactics, consider your time perspective (which you can test here), responsibility levels and history with debt. If you’re the kind of person who always handed homework in on time, never misses an appointment and understands how to budget – well you can probably handle a credit card.

Having a credit card in your wallet doesn’t just mysteriously incur debt, but it can magically help you improve your credit score.

Expertise from a former Credit Card executive:

Your credit score measures your ability to behave responsibly when you borrow money. Lenders use this score to see the likelihood that you will repay. So, the score looks at your behavior when you borrowed previously. Prepaid cards and debit cards do not involve the bank lending you money, therefore they are not included in your credit score.

2. Carry a balance on your credit card; it helps your score

NO, NO, NO!

Sorry, was that confusing?

Let’s try again: NOOOOOOOO!

A terrible myth is floating around out there that carrying a balance on your credit card and only paying the minimum due each month will help your credit score.

This is simply untrue.

It may have started by someone saying, “Don’t pay off your credit card until your credit card company sends you a bill. Paying it off early doesn’t help your score.” And it morphed into, “Don’t pay off your entire bill, it will help your score.”

Wherever it came from, it’s flat out wrong.

Each month you should pay your credit card bill on time and in full. If you can’t afford to pay off the balance in full, then pay at least the minimum (preferably a little more than the minimum) on time. Never miss paying at least the minimum because missing a payment – even by a day – can cause major damage to your credit score.

If you’re carrying a low balance on your credit card and paying the minimum month-to-month because you heard you should, you aren’t damaging your score nor are you improving it. But you are losing money each month in interest to your lender. Why throw away money?

Keep in mind: Carrying a high balance from month-to-month can hurt your score because you look irresponsible to lenders.

If you’re struggling with credit card debt, consider utilizing a balance transfer to cut the interest rate and cost of paying down the debt.

Expertise from a former Credit Card executive:

The two most important parts of your credit score are paying on time and utilization. Utilization is your statement balance as a percent of your total available limit. Your goal is to keep that utilization below 30%. Nowhere in your credit score does it reward you for paying interest on your balance.

3. Only have one credit card

This myth is linked with the notion that people can’t have a credit card in their wallets without incurring debt. This is valid for some, but not everyone.

If you feel you can’t handle paying off bills on multiple credit cards because you’ll either a) forget b) rack up too many purchases or c) get overwhelmed, then stick with one.

For those who are organized, responsible and maybe like to take advantage of cash back rewards – then go ahead and get more than one credit card.

We recommend finding a card at that matches your particular spending habits. We make this easy with our cashback rewards tool.

It also is useful to have at least one card with a low interest rate, like a PenFed VISA card at 9.99%, in your metaphorical freezer. In case of an emergency, it’s best to use a card with a low-interest rate in case you won’t be able to pay off the full balance.

Expertise from a former Credit Card executive:

Your goal is to keep utilization low. One way to make sure that happens is to have a number of credit cards open. That increases your total limit available, making it easier to keep your utilization low.

4. Opening a credit card will hurt my credit score

Oh, don’t be so dramatic!

Opening a credit card will only drop your credit score by a handful points, usually about five points. If you have a score resting comfortable in the 700s, this is no big deal.

If you’re in the 500s – 650 range, then you should focus on improving your score, and you likely won’t be eligible for many of the better credit cards. Instead, you may need to focus on a secured card first in order to improve your score.

One exception to the rule: if you’re applying for a mortgage or another loan, you should hold off any applying for any forms of credit or doing anything that may cause a dip in your score. The higher your credit score when applying for a loan, the lower your interest rate will likely be.

Remember: your credit score isn’t a trophy!

Expertise from a former Credit Card executive:

If you open a new credit card and max it out, it will hurt your score and your financial health. Applications for credit take, on average 10 points off your score. But, so long as you behave responsibly, the impact of that reduction wears off quickly. And, if you apply for credit to get a lower interest rate, helping you pay off your debt faster, then your score will improve even more quickly.

5. Don’t accept a credit limit increase

Get an offer to increase your credit limit? Yes, your lender is trying to lure you into a trap. But get this – you can use their trickery to your advantage.

To understand why, let’s recap how your FICO credit score works:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Types of credit used (10%)

“Amounts owed”, which accounts for 30% of your score, is also referred to as utilization: the amount of your credit limit you use. The more debt you have, the lower your score. The ideal utilization is 30% or less of your overall credit limit.

For example, if you only have one credit card with a $2000 credit limit and spend $800 a month on your card, that’s a 40% utilization ratio.

Now, let’s say your bank offers you a $1000 increase on your credit limit. If you keep your spending the same at $800, but have a limit of $3000, your utilization will decrease to about 27%. This small change will help move your credit score up.

Another way to increase your overall credit limit is to simply apply for another card.

Of course, if you tend to overspend and know that you’ll just max out a card with a higher credit limit then stay away from an increase or a second card!

Expertise from a former Credit Card executive:

So long as you keep your utilization low, credit limit increases should not hurt you. If you call and ask for an increase, they may run a credit bureau and put a hard inquiry on your report. That could result in a 10 points drop. But, when a bank offers you an automatic credit limit increase, you should not have any negative side effects.

Have you heard another rumor or myth you want details on? Get in touch with us via Twitter, Facebook or email (info@magnifymoney.com).

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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