Think you know all there is about having a credit card? You may be falling for some of the most common credit card myths. A 2016 Nerd Wallet study conducted by Harris Poll surveyed over 2,000 consumers, quizzing them on their knowledge of credit and credit card practices. Some of the top myths that surfaced from the study included…
Over half of borrowers are of a mindset that carrying a balance improves their credit score. This is not true or false—it all boils down to your credit utilization ratio, the outstanding balance divided by the total available credit on the account. Credit utilization, or debt-to-credit ratio, is the second most important factor to your credit score, after payment history. The truth is that carrying a balance only costs you more money in interest, taking you longer to pay it off. Remember that using your card is what builds your credit, but you don’t need to carry a balance from month to month.
Tip: Use credit cards regularly, but pay the balance in full each month to keep credit utilization low.
Minimum payments are just that—minimums. The payment amount requested by the issuer is adequate for payment history—the single most important factor to your credit score. However, debt-to-credit ratio is negatively affected when only the minimum is paid. You’ll remain in good standing with the credit card company, but you aren’t doing yourself any favors by sticking to the minimum every month. In doing so, you’ll pay a whole lot more in interest and keep yourself in debt longer.
Tip: Pay the balance in full before the statement closing date—this helps avoid interest, additional fees and improves credit.
The Nerd Wallet survey also showed a whopping 90% of respondents believe the number of cards they have impacts credit score—potentially the reason why most people close accounts that they don’t need or those with higher interest. Although a credit inquiry is added to your report each time you apply for a new card, nearly 65% of your FICO score is defined by factors that can be achieved by multiple cards (myFICO)—a smart move if you know how to use them wisely. Unless you’re a new credit card user, it’s not necessary to restrict yourself, but space out applications to reduce the impact.
Tip: If you’re organized and diligent with payments, it’s fine to have more than one credit card, especially if one offers rewards like cash back and travel incentives.
A survey from the National Foundation for Credit Counseling reports that nearly ¼ of Americans don’t pay their bills on time. What these consumers may not know is that payment history represents a whopping 35% of your credit score. Credit issuers can decide how forgiving they are for missed payments. Even if you are successful in reputing the late fee, unless the issuer removes it from your account, your credit will be impacted by the late payment. Think paying less than the minimum is better than nothing? Think again. An on-time payment that’s less than the minimum decreases your credit score, and makes it more difficult to qualify for increases or additional lines in the future.
Tip: Set up auto bill pay to avoid the repercussions of late or missed payments.
When a credit issuer offers you an increase, they benefit by the extra interest earned. However, this is only the case if you use the credit. The people who get in trouble with credit limit increases are those who tend to max out cards. If you accept the increase, but keep spending and payments the same, your credit (and wallet) won’t be affected. Your credit score can also benefit because debt-to-credit is lower.
Tip: If you ask for an increase, it’s a credit inquiry on your report. If the increase is automatic, your credit report remains unchanged.
At Partners Financial FCU, our goal is to educate members and guide them in making the best decisions for their financial health—much of which revolves around credit. If you’re looking for a partner to help you reach financial success, learn how to become a member now! For information on rates, rewards cards and more, contact Partners Financial FCU today at 804-649-2957.