Credit cards are an integral part of financial management for many, but common credit card misconceptions can lead to poor financial decisions. Understanding the truth behind common myths can help you use credit cards more effectively and improve your financial health. Here, we address eight widespread credit card misconceptions and reveal the truths behind them.
1. Carrying a Balance Improves Your Credit Score
Misconception: One of the most common credit card misconceptions that many people believe is that carrying a balance on their credit cards from month to month will positively affect their credit score.
Truth: You should actively use your cards to demonstrate responsible credit use, but it isn’t necessary to carry a balance. Carrying a balance does not improve your credit score. In fact, it leads to unnecessary interest charges. Better strategy is paying off your balance in full each month as it shows lenders that you can manage debt responsibly without accruing interest.
2. Closing Old Credit Cards Boosts Your Credit Score
Misconception: One of the other common credit card misconceptions is that closing old or unused credit cards can simplify finances and boost your credit score.
Truth: Canceling your credit cards with the hope of fixing your credit might not be the best option. Closing your credit card accounts can actually harm your credit score by reducing your overall available credit and increasing your credit utilization ratio. It’s often better to keep old accounts open, especially if they don’t have annual fees, to maintain a longer credit history and lower credit utilization.
3. You Need to Carry Multiple Cards to Build Credit
Misconception: Some think that having multiple credit cards is necessary to build or improve a credit score. This is one of the other credit card Misconceptions to build your credit.
Truth: While having more than one card can help manage credit utilization and improve your credit mix, it is not necessary to carry multiple cards. Managing one card well, making payments on time, and keeping balances low can be just as effective.
4. Checking Your Credit Score Lowers It
Misconception: A widespread fear is that checking your own credit score can lower it. This is again one of the many credit card misconceptions.
Truth: Checking your own credit score is a “soft inquiry” and does not affect your score. Regular checks are encouraged as they allow you to monitor your credit health and spot any potential errors or fraudulent activities early.
You can check your credit score as often as you’d like without hurting your credit. Monitoring your score can help you track the progress that you’ve made when building credit.
5. Minimum Payments Are Enough
Misconception: Some credit card users believe that making only the minimum payment each month is sufficient to handle credit card debt effectively. However, this approach can quickly lead to financial trouble.
Truth: Only making minimum payments can keep your account in good standing but does little to reduce your debt, as most of the payment goes towards interest. It’s advisable to pay more than the minimum to decrease balances more quickly and reduce interest costs.
6. Credit Cards Are Only for Big Purchases
Misconception: There is a notion that credit cards should only be used for significant expenses. Actually this is one of the many credit card misconceptions.
Truth: Credit cards can be used for both large and small purchases. Using a credit card for everyday spending and paying off the balance each month can help track expenses, earn rewards, and build credit history.
7. You Can’t Get a Credit Card with Bad Credit
Misconception: People often think that bad credit completely disqualifies them from obtaining a credit card. This is another common credit card misconceptions that hinders many people to build up their credit.
Truth: There are credit cards specifically designed for individuals with poor credit histories, such as secured credit cards. These cards require a cash deposit that serves as the credit limit and can help rebuild credit over time.
8. Interest Rates Are Set in Stone
Misconception: Many users assume that the interest rates on their credit cards cannot be changed.
Truth: Interest rates can sometimes be negotiated, especially if you have a good payment history. Additionally, taking advantage of promotional offers like 0% APR on purchases or balance transfers can temporarily reduce interest costs.
9. It’s Bad to Have a High Credit Card Limit
Misconception: Many people believe that having a high credit card limit is a negative thing.
Truth: In fact, lenders often see a high credit limit as a sign that you are a low-risk borrower, which can positively impact your credit score. A high limit can help keep your credit utilisation ratio—how much of your available credit you’re using—low. A lower utilization ratio is generally seen as favourable by credit scoring models. As long as you manage your spending and don’t max out your card, a higher credit limit can be beneficial.
10. Credit Card Interest on purchases is Applied Immediately
Misconception: There is another very common credit card misconceptions that many people believe that credit card interest starts accruing as soon as you make a purchase.
Truth: In fact, interest only applies if you carry a balance past the due date. Most credit cards offer a grace period during which no interest is charged if the balance is paid in full by the due date. This is why it’s crucial to pay off your balance each month.
11. Low APR is the Most Important Feature of a Credit Card
Misconception: Many people believe having a very low APR on a credit card is very beneficial for them when they carry their balance over time. It is beneficial but it’s not a critical feature to consider when applying and using a credit card, here is why.
Truth: If you’re confident and a credit card user who will pay your balance in full and on time each month, the low APR becomes irrelevant, as interest won’t apply.
In this case, other features like cashback, airmiles, and rewards may be more beneficial to your credit spending and purchases. Consider what you value most in a credit card and choose one that aligns with your spending habits and financial goals.
Summary
Dispelling common credit card misconceptions can empower you to make better financial decisions. Understanding the truth about credit card usage helps manage debts more effectively, improve credit scores, and optimize financial resources.
Frequently Asked Questions
Q1: How often should I check my credit score?
A1: It’s a good practice to check your credit score at least once a year. However, if you are planning to make a significant financial decision, such as applying for a mortgage, more frequent checks can be beneficial.
Q2: Is it harmful to have multiple credit cards?
A2: Having multiple credit cards is not inherently harmful if you can manage them responsibly. Ensure that you can keep track of multiple payment dates and control your spending on each card.
Q3: What should I do if I can’t afford to pay more than the minimum payment on my credit card?
A3: If you find yourself unable to pay more than the minimum, try to at least maintain that minimum payment to avoid penalties. Additionally, consider contacting your credit card issuer to discuss hardship options that may be available.
By understanding and addressing these common misconceptions, you can use credit cards to your advantage and maintain a healthy financial status.