There are many myths and rumors out there about how to spend on a credit card, when to pay it off and whether or not to even have a card. Unfortunately, some of these credit card myths, if followed, will cause more harm to your wallet – and your credit score – than good.
Here are five of the most common credit card myths – and the reality.
1. The myth: It’s better to never 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, and end up overspending and getting into deep, unmanageable debt.
Reality check: For the responsible individual, however, a credit card offers one of the easiest ways to establish and build a 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 understands how to budget and manage your finances, you can probably handle a credit card. After all, having a credit card in your wallet doesn’t just mysteriously incur debt, but it can help you improve your credit score.
And remember: Having no debt or payment history at all, which means you will have no credit score, can be just as damaging when you are trying to get a loan as having a low credit score.
2. The myth: Carrying a balance on your credit card helps your score
You may have heard that carrying a balance on your credit card and only paying the minimum due each month will help your credit score, as it shows lenders you have debt and can manage to pay it off, even if slowly.
Reality check: This is 100% untrue.
Each month, you should pay your credit card bill on time and in full. Sure, if you can’t afford to pay off the balance in full, then pay at least the minimum (preferably more than the minimum) on time. But it does not boost your score if you keep the debt and chip away at it slowly.
If you’re carrying a 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? And carrying a high balance from month-to-month can actually hurt your score, because you look irresponsible to lenders and have a higher credit utilization rate (the amount of debt you have in relation to your total credit limit). It’s ideal to have a utilization rate below 30%, at least. The lower, the better in this area.
If you’re struggling with credit card debt, consider a balance transfer to cut the interest rate and cost of paying down the debt.
3. The myth: You should only have one credit card
This myth is linked with the notion that people can’t have a credit card in their wallet 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.
Reality check: If you are organized, responsible and like to take advantage of cashback rewards, however – go ahead and get more than one credit card. This can even help boost your credit score, as it can lower your overall utilization rate.
We recommend finding a card that matches your particular spending habits, which may help you to get money back on your purchases. We make this easy with our cashback rewards tool.
4. The myth: Opening a credit card will drastically lower your credit score
You may believe that opening a new credit card will cause your credit score to automatically plunge.
Reality check: Opening a credit card will only drop your credit score by a handful points. If you have a score resting comfortably in the 700s, this is no big deal.
If you’re in the 500 to 650 range, then you should focus on improving your score, and you likely won’t be eligible for many of the better credit cards, anyhow. Instead, you may need to focus on getting a secured card first, to help improve your score.
One exception to the rule: If you’re applying for a mortgage or another loan, you should hold off on applying for any forms of credit, or doing anything that may cause even a small dip in your score. The higher your credit score when applying for a loan, the lower your interest rate will likely be.
If you are in the market for a new card, here is a roundup of some low-interest credit cards.
5. The myth: You should never accept a credit limit increase
Did you recently get an offer to increase your credit limit? You may think your lender is trying to lure you into a spending trap.
Reality check: You can use a credit limit increase 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, includes utilization. As discussed before, that’s the amount of your credit limit you use. As discussed above, a lower utilization rate is ideal.
Consider this scenario when thinking about getting a credit limit increase: If you have only one credit card with a $2,000 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 $1,000 increase on your credit limit. If you keep your monthly spending the same at $800, but have a limit of $3,000, your utilization will decrease to about 27%. This small change should help boost your credit score.
Of course, if you tend to overspend and know you’ll just max out a card with a higher credit limit, you might want to avoid getting an increase. However, the idea that you should never accept an offer to increase your credit limit is simply wrong.
The bottom line
The myths we discussed here should, for once and for all, be vanquished. If you take them as gospel, you may cause unintended harm to your credit score, and end up paying more than you should for items charged to your credit card. The most important thing when it comes to credit cards is being a responsible user and not incurring debt you cannot manage.