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Updated on Wednesday, May 13, 2020
There are many myths and rumors about how to use 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 can cause more harm to your wallet – and your credit score.
Here we bust five of the most common credit card myths – along with the truth.
Myth No. 1: 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, but that doesn’t have to be you.
Reality check: For the responsible individual, however, a credit card offers one of the easiest ways to establish and build a credit score and 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 means you will have no credit score, which can prevent you from being approved for an apartment lease, car loan or a mortgage down the road.
Myth No. 2: Carrying a balance on your credit card helps your score
You may have heard that carrying a small balance on your credit card or only paying the minimum due each month will help build up 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 payment due (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 as you are paying interest on that balance to your lender. Why throw away money? Plus, carrying a high balance from month-to-month can actually hurt your score, because you look irresponsible to lenders when you have a high credit utilization rate (the amount of debt you’re carrying in relation to your total credit limit). It’s ideal to have a utilization rate below 30%, at least. The lower, the better.
If you’re struggling with credit card debt, you may want to consider a balance transfer card that offers an introductory 0% APR for a certain time period to cut the interest charges and cost of paying down the debt for a while.
Myth No. 3: You should only have one credit card
This myth is linked with the notion that people can’t manage multiple credit cards in their wallet without getting in over their heads in debt. While this may be valid for some people, it doesn’t apply to everyone.
If you feel you can’t juggle multiple credit cards because you’ll either a) forget multiple payment due dates, b) be unable to resist racking up too many purchases or c) get overwhelmed, then stick with one.
Reality check: If you are organized, responsible and would like to take advantage of cashback or travel rewards cards, 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 as a new card increases your available credit.
We recommend finding cards that match your particular spending habits, which may help earn money back on your purchases or help fund future travel goals.
Myth No. 4: Opening a credit card will drastically lower your credit score
You may have heard 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 of points and it should recover after about a year of adding positive payment activity to your credit reports. If you have a score resting comfortably in the 700s, this is no big deal.
If your credit score is 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 look into 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 new credit, or doing anything that may cause even a small dip in your score. The higher your credit score when applying for a big loan, the lower your interest rate will likely be.
Myth No. 5: 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 by boosting the amount of money you can borrow.
Reality check: You can use a credit limit increase to your advantage.
To understand why, let’s recap the five factors that play into your FICO credit score:
- 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 called your credit utilization ratio. As discussed before, that’s the amount of your credit limit you use. The less you use, the better for your credit score as it shows lenders you can exercise restraint. Your credit utilization is measured by each card as well as across all your credit products. Loans, meanwhile, don’t factor in this ratio as the amount borrowed and payment are fixed.
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.
Plus, you can also request a credit limit increase yourself. The odds of getting your request approved will depend on if you’ve managed the card well over a certain period of time by keeping the balance low, paying on time every time and haven’t applied for too many other credit lines recently.
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 unintentional 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.