Credit Cards are a keystone of Americans’ purchasing habits. They are no doubt the best financial tool available today as it is easy to carry, provides funds for an emergency and increases your credit scores.
However, like any other financial product credit cards do seem to create a certain amount of anxiety. A Nerd Wallet survey found that a surprising number of Americans are struggling with basic credit card issues ranging from credit scores to revolving debt to reward cards. This is due to the fact that credit cards are surrounded by certain rumors and myths.
So, when it comes to credit cards, it is important to know how to separate truth from myth. Here are five popular credit related myths which plague the consumers, plus the facts that repudiate them.
Myth 1: Using a Credit Card can hurt your credit score.
Fact- Credit card usage does not hurt your credit score.
One common misconception regarding the usage of credit cards is that many people fear that it would hurt their credit score. Well, it is time to burst this myth. The fact is that it should be the first step a person must take towards building a credit score. Credit scores are calculated on the basis of the past use of debt and credit. The irony of credit score is that if you do not have debt or you do not use your credit, you don’t have a score. It will be difficult for you to get certain jobs, apartments and loans in the future.
Tip: Even if you like paying your bills as you go, it is wise to get a credit card and pay off your credit every month to maintain a credit history. You should also keep your credit utilization ratio between 20-30%. A credit card can hurt your credit score if you do not use it wisely and rake up huge outstanding bills.
Myth 2: Maintaining a balance on your credit card helps your credit score
Fact: Not paying your dues can hurt your credit score.
A majority of consumers (54%) are under the impression that carrying a monthly debt balance improves their credit history. This is entirely wrong as this is the worst financial mistake you can make. The minimum amount due is the amount you need to pay to avoid any late charges. It is only a fraction of your total due and varies from bank to bank.
In a short term it is nothing but a myth. You will be relieved that a burden has been lifted from your shoulders but the trouble will start when the interest on the balance unpaid amount accumulates and will be bouncing back to be paid. Your debt will build up in a huge pile and you will soon find yourself neck deep in a pool of debt. Your credit scores will see new lows along with your finances and it will also hamper your ability to raise funds in future.
TIP: The best strategy is to use your credit cards and pay off your bills in full each month, so you can keep your overall debt-to-credit limit low.
Myth 3: Getting Rid of Old Cards Helps Your Credit Score
Fact: No, it is just the opposite
Another myth about credit cards is that old credit cards hurt your Credit Score. But, the truth is just the opposite. The saying “old is gold” is very true in this scenario. If you leave your old cards open it may have a number of benefits. Firstly, they bear testimony to your long time money management skills. Secondly, the older the credit account the more value it adds to your credit history (determines 15% of your score). The other important benefit is that it will keep your credit utilization ratio (the amount of available credit compared to the credit limit) low. It influences 30% of your FICO score.
TIP: You should avoid closing an old card without a good reason to do so. If you find that the fees associated with your old card are outweighing the benefits you might consider closing the account.
MYTH 4: You can improve your credit score by using a debit card.
Fact: It will have no effect on your credit score.
Though both credit cards and debit cards appear identical, they are at the opposite side of the spectrum and serve different purposes. With a debit card you withdraw money out of your own account whereas, on the other hand a credit card means borrowing short-term funds from financial institutions which you should pay back in full. Your credit score reflects your repayment ability and lenders look at your behavior when you borrowed previously. Prepaid cards and debit cards will not help you better your CIBIL score as there is no involvement of debt in the process.
TIP: You should use your credit card for everyday purchases and loans which you really need and pay them off in full before the due date. Avoid withdrawing money from your credit card as you will be subjected to high fees and high-interest rates and this will quickly subtract any short-term gains.
Myth 5 – Keeping many cards is bad for my credit score.
Fact- The number of credit cards that you’re holding will have no bearing on your credit score.
This myth is conceived from the belief that every card plays a role in increasing your debt. But the fact is no one credit card can satisfy all your needs. You may need an Airline Credit Card for discounts on flights and hotels, a cash-back credit card to get some hard earned money back in your account and a shopping credit card to get special discounts. Your friends and relatives may discourage you to have more than one card as they are worried that it would play a role in increasing your debt. But as long as you are using your credit cards wisely it will not negatively affect your credit scores. You just have to keep a tab on the amount you spend on each card and pay your bills in time.
TIP: You should not apply for too many credit cards at one go. This could lead banks to reject your request as you will look like a person who is desperate for finance and you have no means to repay your debt. So you should space out your applications for credit cards. Secondly you should not be impulsive with your purchases. Finally, avoid piling up tons of credit cards that have high annual fees.
If you have been assailed by any such myths it is time to embrace facts. It will help you to be more discerning in decision making and build a strong financial foundation.