- There is no particular benefit to keeping a balance on a credit card.
- Checking your credit report does not hurt your credit score.
- A credit card account can have different balances with different interest rates.
Credit cards can be a great resource. Without having to carry cash or deal with the hassle of checks, you can use a credit card to buy things almost anywhere. But there can be another side to using credit cards that isn’t as pleasant. Credit card balances sometimes get out of hand, debt can build, and financial trouble can begin to make life more difficult. Perhaps it isn’t surprising that credit card myths have developed from something with such awesome (and, frightening) powers.
In this article, we’ll examine 10 common credit card myths, set the record straight, and give you some good ideas of how to make the most of the cards you might have in your wallet.
Make sure your money decisions are based in fact, not fiction. Whether you’re just starting out or preparing for retirement, Best Egg Financial Health gives you the tools and knowledge to help you take full control of your finances, make confident decisions, and potentially reach your goals — with no judgment, ever.
Myth 1: Carrying a balance builds your credit
Contrary to popular belief, carrying a balance on your credit card is not beneficial. Allowing a prior month’s balance to carry over means you’ll pay interest on it, and it doesn’t build credit or win you bonus points with the credit bureaus.
Believe it or not, having little or no balance is good for your credit-utilization ratio. That’s the percentage of available credit that you are using at any given time. This credit-utilization rate is an important factor in your credit score, and it’s generally recommended to keep your ratio under 30%. In other words, it’s best to only use 30% of your total credit limit across all your revolving credit accounts. Paying off balances every month reduces the interest charges card holders pay and lowers credit utilization.
Myth 2: Using credit cards results in debt
In the short term, using your card will mean incurring debt. Making a charge on a credit card is a form of borrowing money. But if you pay off your credit card balance every month, you won’t build up unpaid credit card debt. It’s only when you don’t pay off the balance, and perhaps make only minimum payments, that you start to accumulate debt that could impact your credit score negatively.
Myth 3: Applying for credit cards hurts your credit
There’s a small nugget of truth there. Applying for a new credit card includes a lender running a credit check and looking at your credit history. But that’s true whether you’re applying for a credit card, a car loan, or other types of new credit. If the credit inquiry is for a pre-qualification, the credit card issuer may do only a soft inquiry, which has no impact on your credit. But if you move forward to open a new credit card account, the lender will do a “hard” credit inquiry and review your entire credit history. The hard inquiry is added to credit reports and may negatively impact a credit score — but usually no more than 5 points or so.
However, once you’re approved, your credit file account history will reflect your newly available credit. That extra credit should lower your debt-to-credit ratio, and — within a month or two — that could result in a higher credit score. A high credit limit, if unused, could build your score, not lower it, regardless of small losses from opening a new account.
Myth 4: Checking your credit report lowers your credit score
While a lender checking your credit history may result in a dip in your score, checking your own credit report does not lower your credit score. When you check your own credit score and report, it’s considered a soft inquiry. Only hard inquiries have any effect — and, as we said above, the impact there is usually minimal. It’s good practice to keep an eye on your credit score and credit report, and you can do that with Best Egg Financial Health. It’s free and you can sign up for alerts that will help you know what’s happening with your credit and things you can do to stay on track.
Myth 5: Don’t have more than one credit card
As long as the cards are responsibly managed, there’s no downside to having multiple cards. In fact, having multiple credit cards may increase your credit score, because additional cards add to your total available credit. (So long as you don’t run up the balance and you use them responsibly.) Having multiple cards is a simple way to build credit and raise credit scores, if your credit card usage remains under control.
Myth 6: Credit cards have only one interest rate
Interest rates come in many flavors. Credit card issuers usually assign one rate for purchases, another rate for cash advances, a third for balance transfers, and, perhaps, a fourth for promotional rates. Credit card bills list each of these, including the annual percentage rates (APRs) and how much of your balance falls under which rate. Your payments are split, per lender rules and according to federal regulations, between the various balance categories. Read your card’s documentation or statement to find out how your payment is divided up and applied.
Myth 7: Credit card interest rates can’t be reduced
Most cards have variable APRs, so if the market rate drops, the card’s rate might drop as well. If you have a great payment history, the lender might reduce your APR automatically as a benefit of being a cardholder. Also, if you call the lender’s customer service number and ask them to lower your rate, they may just do it. Costs you nothing to try. A lower rate lowers monthly interest charges, so it’s worth the effort.
Myth 8: Missing one payment lowers your credit score
While it’s always a good practice to make your payments on time, sometimes you just don’t make the due date. Some lenders won’t report only one late credit card payment, and, if they do, they will often wait 30 or 60 days before contacting the credit bureaus. If you’re late on a payment, call your lender right away, explain why you missed the payment, and arrange to make a payment over the phone. You might be charged a late payment fee, but lenders are often forgiving if it’s your first missed payment — or at least, the first one in a while. Ask if they’ll waive the late fee. You might be pleasantly surprised.
Myth 9: Missing a few payments won’t affect your credit
Unlike missing only one payment and then calling the lender, missing multiple payments could have serious consequences. You could incur compounding late fees, and, the lender may even increase your interest rate to the default APR (which is usually much higher than your standard APR). Consecutive late payments will more-than-likely be reported to the credit reporting agencies, and that could lower your credit score. If you’re caught in this cycle, call the lender as soon as possible and ask what you can do to resolve things.
Myth 10: Don’t open a new card without closing an existing one
Closing an existing card when you’ve paid off the balance could actually reduce the amount of your available credit. That, in turn, would hurt your credit utilization. It also could impact other parts of your credit score such as the credit mix and the length of your credit history. Before closing an account, consider how old it is and how much of your available credit it represents.
Myth 11: Making the minimum payment is fine
Technically, there’s nothing wrong with making just the minimum payment. However, the minimum payment tends to be a small percentage of your balance — so small that it might not even cover the interest charges. If you’re paying $100 a month on your card, but incurring $90 in interest charges, that’s putting only $10 toward your balance every month. On a large balance, it could take years to pay it off with only minimum payments, and the amount of interest you pay will dwarf the principal. So, when you can do so, try and pay more than the minimum monthly payment — you’ll save money in the long run.
Credit card myths unmasked
Knowing the truth about credit cards is half the battle. Managing your spending responsibly, understanding your credit activity, and understanding how to navigate the card universe could allow you to cut costs, keep your credit strong, and help you reach your financial goals.