Having—and not abusing—credit cards is an important element in establishing strong financial footing. But a lot of straight-up misinformation surrounds the world of plastic payment and can ultimately wreak havoc on your credit score. To clear the air and ensure you have all the necessary information to make the best decisions for your needs and your financial future, we’re busting a few widespread credit card myths. Read on.
Myth: Applying for them hurts your credit score.
Applying for a credit card only lowers your credit score by about five points, so doing so within reason is no harm. If you’re already in the 500-600 credit score range, it’s likely you won’t be approved for most cards anyway. It's important to note that while applying for one card will do no marked damage, it isn't advisable to get overzealous and apply to several at once. Your credit score is meant to reflect how dependable you will be with borrowed money, and applying for lots of cards in a short span of time translates to erratic financial behavior.
Myth: A fixed rate will never change.
If you make a late payment, your credit score changes, or the introductory period has ended, your fixed rate can, in fact, shift. Credit card companies do, however, need to advise cardholders of any changes—so if your rate changes, it shouldn’t be a surprise. Just be sure not to toss any mail into the trash before reading it carefully.
Myth: Canceling an unused card is good for your credit score.
Though it may be tempting to tidy up the loose ends of any older accounts, leaving some unused cards open can work to your advantage. The simple explanation for how and why this works is because when you close a card, you lower your total credit limit, thus raising your credit utilization, or balance-to-limit ratio—i.e., the amount of debt you currently have in relation to all of your credit limits combined. Your goal is to have this ratio remain low—by keeping your total limit high and your balance small—which can be assisted by having a few cards open that you do not actually use (or that you use lightly). The only unused cards definitely worth closing are those with monthly fees.
That said, there are some benefits to closing an unused card. Some underwriters for home loans do not like to see unused cards open. If you have a lot of unused cards open, this increases the amount of revolving credit, which can hurt your score. Having multiple cards open also puts you at a higher risk of identity theft. And, of course, it can be tempting to have a high credit limit available to you, so know yourself.
Myth: If you don’t have a credit limit, you can spend freely.
A credit limit always exists, even if it isn’t explicitly stated or mandated. Make sure you are only spending what you can pay back each month.
Myth: Your debt won’t impact your rewards.
In order to take advantage of any credit card rewards programs, you will need to pay off your balance on time every month.
Myth: Debt is a reality of having—and using—credit cards.
Set a budget and stick to it. Use one of the many personal finance mobile apps to keep track of your daily expenditures and spending. The intangibility of credit cards can be a slippery slope, but with due diligence, it is absolutely possible to spend within your means each month.
Myth: Only having one credit card is best.
If you are unconfident that you’ll be able to rein in your spending, then by all means—keep it simple with just one. But if you’re the organized type, having multiple credit cards won’t necessarily hurt you. What’s more, it will allow you to collect various types of rewards for the different cards you have and use.
Myth: Carrying a balance on your card is good for your credit score.
You should be paying your credit card bill on time, and in full, every single month. If for some reason you cannot do this, be sure that you at least pay the minimum on time, ideally a bit more.
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Do you have any questions or pointers about credit cards? Tell us in the comments.