That tiny piece of plastic in our wallet is the source of major myths about our finances. Learning what really drives your credit score and setting a responsible strategy for credit card usage can help put you in control of your debt. Here’s the reality behind of the most common misunderstandings about credit cards.
1. Opening a credit card hurts your credit score.
If you have a very low score, then opening another card might not be the best near-term financial strategy. You’ll also want to consider timing. If you are planning on getting a home or car loan within the next couple of months, then be careful about new credit lines, as they will cause a slight dip in your core when a new bank goes to check your credit and open the account. When you apply for a major loan you want your score to be as high as possible, because that will help you get the best interest rate. Deferring new card openings can be a good idea in those cases.
2. You should only have one credit card.
This advice is common when you’re first starting to build your credit. As a way to limit your spending it is great for your wallet, but you don’t necessarily need to confine yourself to one piece of plastic. If you can responsibly manage your spending and stay on top of payments, multiple cards are okay. If you’re adding another credit card, pick one that gives you rewards and perks that are relevant to your own spending habits.
3. If you go over your credit limit, it’s no big deal.
Most credit card companies will allow a few purchases that let you go over your limit, but it’s not a great habit. It is one of the quickest ways to have a card issuer raise your interest rate. You’ll also probably end up paying an over-the-limit fee. Sneaky fees can eat away at your budget over time, so this is definitely something to stay on top of!
4. It’s good enough to make the monthly minimum payment.
A credit card will almost always require a minimum payment. When you’re first starting to build credit, it can be tempting to just pay that minimum each month. It’s best, however, to pay off as much over that as you can, with the ideal being to pay off your balance every month. Not only does it make you a responsible credit user, but it can also help you be sure to stay on track with your budget goals. Setting up an automatic payment or a reminder on your calendar to stay on top of your payments is essential.
5. You have to carry a balance to improve your credit score.
Credit card utilization is part of what helps improve your score, but you don’t need to leave a high balance on a card to do that. In fact, leaving a balance on your card can cause you to pay unnecessary interest charges. Credit card companies also watch your card utilization rate, which is the percentage of how much of a balance you carry relative to your total card limit. Lenders don’t like this rate to be too high because it can be an indicator that you might not be able to pay your debt. Keeping your utilization rate around or less than 30% of your total outstanding credit available is a good goal to aim for.
6. Your credit score improves when you close a card you’re not using.
It can be tempting to close a card you’re not using. Part of your credit score is calculated by that card utilization rate we just talked about, so keeping an open card that goes unused can actually be a good thing and push down your overall utilization rate if you have higher balances on other cards. If you’re planning to do this, consider closing a store or specialty card with fees or that doesn’t often get used.
7. Store cards are always a bad idea.
Cards issued from your favorite shopping haunts sometimes get an unnecessarily bad reputation. Granted, these do almost always have higher interest rates than other traditional bank-branded cards, but it’s your spending and payment habits that will get you in trouble, not the card!
The way to think of these is as an “accessory” to your other credit cards. Use a store branded card when you know you can pay it off right away and only when your brand loyalty makes the perks of coupons, special shopping days, or free interest windows worth it for your lifestyle. It’s also good to keep these types of cards to a bare minimum; be selective so that the whole mall isn’t represented in your wallet!
8. You should never pay an annual fee for a credit card.
Again, your personal spending habits dictate whether or not this is a good idea. For example, some cards may have a $150 annual fee, but with it you gain access to an airport lounge, or get free checked bags on flights. If you’ve got serious wanderlust, these perks can add up and make it worth it to pay for this type of speciality card.
9. Balance transfers are a good way to save money.
Sometimes it seems the only snail mail we still get is a pile of credit card transfer offers. It can be tempting to see a big splashy 0% offer and think that it’s a great way to get your debt under control. Reading the fine print here is key! Oftentimes, balance transfer offers come with major restrictions, including fees on transferring to a new card. Also be aware that the great rate might not apply to new purchases, or you may not be allowed to pay down your “zero percent” balance until new purchases are also paid off. These little details can add up and totally outweigh the benefits of a lower interest rate, particularly if you’re not able to pay the balance off entirely during the offer window.
There are a lot of card myths out there! Check in with places like the major credit bureaus known for their understanding of credit issues for more info on how to manage your credit responsibly.