How is this for a terrifying statistic? The average American household has a staggering $8,308 in credit card debt.
Where do you fit into that statistic? Are you someone who fears credit cards? Someone who’s maxed out too many of them?
Whether you’ve never owned a credit card or you’re paying off the balance for a card or you’re confused about the best new card to apply for, there sure is a ton of misinformation about credit cards.
We’re here to dispel the top credit card myths floating around. Time to get your financial house and credit score in order once and for all!
Myth: Your Debit Card Can Improve Your Credit Score
Yes, they may look alike, and yes, they may have similar bank logos. Unlike credit cards, however, debit cards do not actually appear on your credit score or even credit history.
When you use your debit card, you immediately withdraw the money from your bank checking account. There is no “borrowing” of money required (which is what you would use a credit card for).
As a result, using a debit card alone will not impact, improve, or decline your credit score. That’s because your credit score doesn’t actually retrieve your bank information!
If you’re looking to build or rebuild your credit and cannot qualify for a traditional credit card, you may want to look into a secured credit card to start.
Myth: Opening a Credit Card Will Hurt Your Credit Score
Your credit score is composed of several different factors. This includes your average age of account, utilization, varied credit mix, and payment history.
While opening a new credit card can initially “take a hit” on your credit score, it will not impact it long-term.
In fact, small fluctuations in your credit score are perfectly normal and to be expected depending on the ebb and flow of how you use your cards. Don’t be alarmed if numbers shift up or down over time- be alarmed if you see dramatic swings. This could be a sign of identity theft or poor money management on your end.
The only caveat to consider: if you plan on getting a new home or car loan within the next few months, hold off on opening any new credit lines. You want your credit score to be as high as possible, as that can assure the best interest rates.
Myth: You Should Carry a Balance to Improve Your Score
This is perhaps one of the most dangerous, misleading credit card myths floating around the financial world today.
While your credit card utilization can help improve your score, you should never leave a high balance on your card if you can avoid doing so.
Any financial planner will tell you this: Avoid carrying a balance! Unless it’s a serious, financial emergency, you should be able to pay off your cards in full each month.
If you can’t afford to pay it, you can’t afford to charge it. Despite what credit card companies may tell you, debt is never a good thing.
A high balance is associated with unnecessarily high-interest charges, which can prolong how long you’re in debt (not where you want to be). In fact, research shows that credit card debt can cost you an additional $1000 in charges per year.
With that said, credit card companies also monitor your card utilization rate, and they don’t want it to go too high. They could perceive this as a red flag that you may not be able to pay off debt.
Rather than fall prey to harmful credit card myths, follow this rule of thumb: keep your overall utilization rate around or less than 30% of your total outstanding credit available.
Myth: Credit Cards with Annual Fees Aren’t Worth It
It may seem strange to drop several hundred dollars on a credit card, but we’re about to debunk one of the best credit card myths out there.
Depending on your personal or business spending habits, you may actually be able to make money or travel hack your way through the world using credit cards.
Despite the annual fee, many of these cards offer exclusive perks like airline credit, airline lounges, free checked bags, and lucrative sign-up bonuses.
One thing to note: if you carry any debt or struggle to pay off your credit cards, don’t mess around with annual fees. You’ll only be adding more financial problems to your plate.
Make sure that you are meeting your financial goals before messing around with maximizing credit card points or rewards.
Myth: Closing an Old Credit Card Doesn’t Affect Your Score
Some people adhere to the following logic. They establish a credit history by opening starter cards with low limits, annual fees, and high interest rates.
As they build credit and qualify for better offers, they shut down the old, inferior accounts.
Don’t be a fool and fall victim to these credit card myths. There’s nothing inherently wrong with closing an unused credit card account. But, you do need to be aware that any closures can impact your credit score.
By closing an account, you reduce your amount of total available credit. This increases your credit utilization compare to your outstanding debt.
With that said, this shouldn’t totally deter you from closing unused accounts- especially if you are paying annual fees. Just be aware that your credit score may take a slight dip in the meantime.
Myth: If There Isn’t a Credit Limit, The Sky Is the Limit
Many credit card companies lure in consumers with elite, exclusive cards that don’t have spending limits.
You may actually believe that you can spend away as you please without worries about maxing out your credit.
Here’s the truth behind these credit card myths: every card does have some kind of spending limit. Some just tend to be higher than others. Furthermore, some are just more upfront than others.
You can’t just purchase everything under the sun- sooner or later, your card will get declined.
Myth: Never Accept a Credit Increase
This is one of those hidden, insidious credit card myths that can end up actually hurting you in the long run.
If you get an offer to increase your credit limit, you may naturally feel skeptical. Is your lender trying to scam you?
The answer is: maybe. Credit companies want you to spend more on their cards. They want more of your money, of course!
However, as it turns out, increasing your credit limit can actually improve your credit score because it increases your overall credit limit. That, in turn, can lower your debt-to-spending ratio.
If you keep your spending around the same, you’ll likely see a small spike in your credit score. If you decide to jack up your spending to “meet that increase,” then it’s best to stay away from the increase.
Myth: You Only Need One Credit Card
Some people believe the sky-is-falling credit card myths that holding more credit cards somehow equates to holding more debt.
While this may be valid for those who struggle with money management, it is not a fair statement to make for everyone.
For example, if you feel overwhelmed by handling multiple cards or you’re already struggling to stay on top of bills, one card will be easiest to manage.
However, if you’re responsible and maybe like to take advantage of cash back cards (or you simply want to separate different types of expenses), it’s okay to get one card.
Just find a card that matches your particular spending habits- especially if you have your own business.
Myth: Checking Your Credit Score Hurts Your Credit Score
Ah, one of those other scary credit card myths. Many people fear to check their own scores thinking that it will ding them.
In reality, your credit score only gets affected when a hard inquiry is pulled. A hard inquiry refers to opening a new line of credit or applying for a loan.
When you check your own report, it’s considered a soft inquiry. That means it does not impact your credit score.
Today, many banks and credit card companies offer free, updated FICO scores. Sign up for those services! You have a right to know how well you’re staying on track.
Final Thoughts on Debunking Credit Card Myths
When it comes to managing your personal finances and deciding what credit card to put in your wallet, knowledge is power.
Just because you’ve “heard” something to be true, doesn’t mean it is. Always check your references and do your own research!
The modern business world runs on credit cards. Make sure you’re updated with what’s best for protecting your credit score and your assets.