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Like many financial products, credit cards are often perceived as daunting and complicated. Which is not surprising given the variety of myths surrounding credit cards. However, when used responsibly, credit cards can actually be a beneficial financial tool to help establish and build your credit score. To do so, it’s important to first understand how to separate credit card myths from facts.
MYTH #1 - You should never get a store-issued credit card
Store-issued credit cards, when used responsibly, can actually help improve your credit score because they show lenders you are able to use various forms of credit wisely. When thinking about applying for a store-issued credit card, note these types of credit cards traditionally have higher interest rates so make sure to research various options to compare the annual percentage rate
(the interest rate charged on your card balance), annual fees, terms and conditions, and rewards programs to find the best fit for you and your wallet.
MYTH #2 - Having multiple credit cards will hurt my credit score
Nope! While opening a new credit card can impact your score, and carrying a high balance on a credit card can hurt your score, having multiple cards has no effect on your score. In fact, it may even help by increasing your utilization ratio, which is your balance divided by your credit limit and is used in determining 30% of your credit score. However, keep in mind that applying for multiple credit cards within a short period of time can be viewed as risky behavior and negatively impact your score. To avoid this negative impact, consider spacing out applications by a minimum of six months.
MYTH #3 - Parents should not add their children as authorized signers
This is a choice that will definitely be unique to each family, but if your credit score is in good standing, adding your child to your credit card as an authorized signer, which will give them their own card tied to your account to make purchases, can help ensure they enter adulthood with established credit. This also gives you the opportunity to talk to your child about credit and teach them how to use it responsibly. However, it’s important to note that you will be liable for their purchases, so consider setting boundaries and rules to prevent them running up balances that you’ll need to pay back on their behalf.
MYTH #4 - All credit cards are created equal
There are a variety of credit card types, like rewards, low interest, credit building, balance transfer, and students. Since all credit cards are different, it’s important to be aware of what kind of credit card you have, or may be looking for, to avoid high interest rates, hefty annual fees, and hidden terms that can be costly if you’re unaware. When looking for a credit card, be sure to read the fine print and ask questions like:
- What is the annual percentage rate and is it a promotional rate?
- What is the annual fee of the card?
- Should I be aware of any fees for specific transactions, like foreign transactions (transactions at a non-U.S. retailer), balance transfers, or cash advances?
If you’re looking to open a credit card, consider following these steps on How to Pick the Best Credit Card for You
MYTH #5 - Credit card interest starts accruing immediately
According to a study by NerdWallet
, this is a common misconception. This study found that more than half (55%) of respondents did not know when the interest started accruing on their credit card purchases. The truth is that interest does not start accruing until the day after
your payment is due. Meaning as long as you pay off the entire balance that is due each month, on or by the due date, you will avoid accumulating and paying interest.
It’s important to note that the interest on credit card cash advances will often times start accruing immediately.
Now that some of the myths surrounding credit cards have been debunked, let’s review some facts to learn credit card best practices:
FACT #1: Having a credit card helps your credit score
30% of your credit score calculation is based on how you use credit, taking into account your total debt, your debt on specific accounts, and how close you are to the loan’s original limit as well. With a revolving line of credit (a type of loan that gives you access to a set amount of money that you can use as you wish – like credit cards), you’re able to improve your score in this area because installment loans (those with a fixed balance and repaid on a set schedule in equal increments - like mortgage, auto, and student loans), do not count towards this area of your credit score.
FACT #2 - Good credit can be built without carrying a balance
If the card is active and is reporting (meaning your lender is sending your credit card activity to a credit reporting agency), keeping your balance as close to $0 as possible will help your score. Just using the card and making payments on time will indicate to lenders and credit reporting agencies that you are a responsible borrower. Carrying a balance will only cost you money so it’s truly best for your wallet to pay off your balance each month.
FACT #3 - Credit limit increase offers should be accepted
When you apply for a credit card, you’re given a spending limit (credit limit) which is based on your income and credit score. Increasing your credit limit will improve your debt-to-limit ratio. Your debt-to-limit ratio looks at how much debt you’re using compared to your credit limit. By accepting a limit increase, you will increase the amount of credit available to you, therefore improving your debt-to-limit ratio and helping to improve your credit score. If you increase your credit limit, it may also help you avoid penalties and fees for exceeding your credit limit.
FACT #4 - Closing a credit card can hurt my score
Although it may be tempting to close a card you’re not using, or haven’t used in quite some time, doing so can hurt your credit score. Closing a credit card can hurt your cumulative debt-to-limit ratio, the length of your credit history, and the different types of loans that report to the credit bureaus, all of which can negatively impact your credit score. In fact, keeping a credit card open but unused can be beneficial as it keeps your overall debt-to-limit ratio lower. However, if one of your credit cards has unfavorable terms, like an excessive annual fee, you could consider closing that card
. To compensate the hit to your debt-to-limit ratio you could pay down the balance on another credit card you have open.
FACT #5 - Do not use all of your credit limit
Did you know that 30% of your credit score is determined by how you use your credit? That is why it is recommended to keep your credit utilization ratio (your balance compared to your credit limit) below 30%; a ratio above this can hurt your score each month. Let’s say your credit card limit is $1,000. To keep your utilization ratio under 30%, your credit card balance should not exceed $300. Even if you pay your entire balance off on the due date each month, FICO, the most widely used credit scoring system created by the Fair Isaac Corporation, may take a snapshot of your account early in the month when your ratio is higher. Be mindful of your utilization ratio and if a purchase puts this ratio over 30% pay it down as soon as you can to reduce the impact.
If you have multiple cards, keep in mind that the 30% utilization ratio applies to both individual
credit cards. Check out this Credit Utilization Calculator
to determine your credit utilization ratio for all of your cards.
FACT #6 - You (definitely) should pay more than the minimum payment
By only paying the minimum payment, interest will begin accruing
on your balance and could add months (or even years) on to your debt repayment. Let’s explore this more. Say the total credit card balance on your statement is $1,000 and the minimum payment due according to the terms of your credit card is 3% of the total balance due or $30. With a credit card interest rate of 18%, it would take almost eight years to pay off that initial $1,000 balance – and cost you nearly $700 more in interest charges.
Use our Credit Card Minimum Payment Calculator
to determine the impact of paying only the minimum payment. This information will also be available on each of your credit card statements.
FACT #7 - If I make my credit card payment 15 days late, it will not be reported to the credit bureau
Lenders understand that sometimes life happens. Although you still may accrue late payment penalties from the lender, your late payment will not be reported to the credit reporting agencies (Equifax
, and Experian
) as late until the payment is at least 30 days past due. However, it is best to always pay your balance in full, or at least the minimum payment, on or before the due date, as part of your credit score calculation is based on your payment history.
Now that you understand how to separate credit card myths from facts, you have the knowledge to better manage your credit card to help establish and/or build your credit.
Updated January 2020
Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.