Busting Common Credit Card Myths
Using a credit card is common for most American consumers, but not every consumer is aware of how to use their card to its full potential.
There are many myths about how to spend and use your credit and it is important to know the truth from fiction in order to avoid racking up debt and damaging your credit.
Clearing up this misinformation can save you money and improve your long-term finances, so here are some common credit card myths -- and their truths -- below.
Myth: Credit cards are dangerous and should be avoided
Truth: If you use a credit card responsibly, you can actually improve your finances.
Overspending and not paying off your debt in a timely manner could cause you to wind up in a seemingly never-ending cycle of debt. If you feel like you may be tempted to spend beyond your means, then a credit card is probably not your best bet. You should always spend only what you know you can pay off at the end of the month.
Not only can credit cards can offer rewards programs and bonuses, but they can help you build your credit score and history, which allows you to qualify for better terms and rates with future lenders (auto loans, mortgages, etc) -- and having no credit history is almost as detrimental as having bad credit.
Myth: Carrying a balance on your credit card helps your credit score
Truth: Carrying a balance and only paying the minimum debt is extremely detrimental to your credit.
At the end of each month, you should pay off your credit card in full. Keeping the debt doesn't improve your credit and carrying a high balance can actually damage it. You will also end up losing money due to the interest added to your balance and miss out on potential rewards.
This is due to the way your FICO® is broken down:
- Payment history: 35%
- Credit utilization: 30%
- Credit age: 15%
- New credit: 10%
- Types of credit: 10%
As you can tell, your payment history (paying on time) and your credit utilization (the balance you carry) are the two most important factors in your credit score. Ideally, you want to keep your credit utilization rate below 30% -- it not only helps your credit, but future lenders will view you as a responsible borrower.
Myth: Paying interest on credit cards is normal
Truth: You will only have to pay interest on your card if you don't pay off your debt in full and on time. Not paying off your balance in a timely manner can result in hundreds (or thousands) of dollars of added interest.
Myth: You should only have one credit card
Truth: Having more than one credit card is beneficial if you are using them responsibly. If you can pay off your debt on time and in full, then you can handle more than one card and take advantage of cashback rewards and bonuses.
Having more than one credit card also means you have more credit available, which helps your credit utilization as long as you are keeping your total debt low and paying it off on time.
Myth: Opening a credit card will lower your credit score
Truth: Opening a credit card will temporarily drop your credit score by a few points. This is due to the hard inquiry authorized by your lender, which will lose all impact in two years.
Checking your own credit or applying for credit will not harm your credit since that is considered a soft inquiry.
Myth: You can build a perfect credit score quickly by opening credit cards
Truth: Credit cards can impact your credit score -- for better or worse. As long as you can keep your credit utilization low and make on-time payments, your credit will likely improve. However, this takes time and to get a perfect credit score, you will have to follow other good credit habits.
Myth: You should close a credit card before opening a new one
Truth: You don't want to close any old credit card accounts since it shortens your credit history, results in having less available credit, and lowers your credit utilization.
Myth: You should never accept a credit limit increase
Truth: You can use a credit limit increase to help your score. This allows you to have lower credit utilization since you have more funds available. As long as you are not maxing out your card and keeping your debt low, accepting a loan increase is beneficial to your score.
Myth: Annual fees are always bad
Truth: It depends. If you are using a card to earn miles, points, and rewards that you will end up using, then an annual fee can be worth it. Bonus: Many lenders will waive the first year of fees. If they don't, you can try to call your provider and ask them to waive the annual fee.
Myth: Only choose cards that offer miles and bonuses
Truth: Cards that offer miles and bonuses are great but consider other cards that may offer other types of rewards such as cashback, rental car insurance, airline fee credits, and more.
Myth: Once you get a bonus or reward, you can stop using the card
Truth: Keeping your card and using it occasionally can help you build a relationship with your bank or lender and canceling it can reduce your chances of being approved for a new card in the future.
Myth: Credit cards are only for purchases you can't buy otherwise
Truth: If you can't pay for it with cash, you shouldn't pay for it with your credit card. Credit cards are a great option for buying what you need and potentially earning rewards and building credit.
Myth: Secured and store cards aren't as good as regular cards
Truth: Secured cards and store cards have their place. It's particularly useful if you are working to build your credit or you haven't built enough credit to qualify for a regular credit card. Most secured and store card issuers are willing to lend to consumers with poor credit, little credit, or no credit.
Myth: Never use your credit card online
Truth: Using a credit card to make online purchases is much safer than using a debit card. If your information is stolen and you find fraudulent purchases on your account, you simply have to contact your credit card issuer to have them taken off. With a debit card, this is much harder to do.
To avoid having your personal information compromised, make sure that you are using a private internet connection and checking that the website is secure (specifically, look for https:// at the beginning of the address).
Myth: You don't need to sign the back of your card
Truth: You absolutely should. This keeps thieves from signing their own name and seals your contract with your issuer, which in turn grants you certain consumer protections.
Myth: You will always have the same interest rate on your card
Truth: It depends. Many cards -- such as a balance transfer card -- offer an introductory APR but will eventually charge interest if you carry a balance after a specific period of time.
Credit card issuers can also change your interest rates for other reasons: if your payments are late; if your APR is tied to the prime rate and you have a variable rate; or if you are considered a high-risk member.
However, the Credit Card Act of 2009 protects consumers by requiring credit card issuers to give you 45 days' notice before changing your APR.
The Bottom Line
Knowing how to use your credit card properly can help you build your credit and reward you with bonuses and perks when used responsibly. Want to learn more about how you can improve your finances? Look to our reputable services here.
What are some benefits I can receive with a credit card with good credit?
- Rewards programs
- Fraud protection
- Auto rental insurance
- Hotel stays
- Discounts on airfare
- Travel expenses
- Interest-free periods
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