Common Misconceptions About Credit Cards

Credit card usage in America is increasing with the average American owning four credit cards. Unfortunately credit card debt is also on the rise. In fact, Yahoo Finance reports that 6%, which is around 14 million Americans, have at least a $10,000 credit card debt. Findings also show that almost half of Americans use credit cards to cover living expenses and that there are users who have been carrying a credit balance from month to month for 15 years. These kinds of practices can harm your credit score.

The way you use your credit card may come about from hearsay from other card users. And some of these can do you more harm than good. In this article, we’ll talk about some misconceptions that surround credit cards that will benefit you in the future.

The more you use your credit card, the higher your credit score becomes

How often you use your credit card isn’t directly linked to how high your score will be. Using your card too much will affect what’s called your credit utilization ratio. Time Magazine says that this is essentially the ratio of the available credit you’re using (which is your current card balance) to your total available credit. Experts suggest you don’t go above a 30% ratio. So rather than using your card for everything and risk pulling up your ratio, it’s better to use it wisely to keep your ratio as low as possible. This will help positively impact your credit score.

Keeping a balance on your credit card help you build credit

There are many ways to build credit, but keeping a balance is not one of them. On the contrary, keeping a balance will just cost you interest and increase your utilization ratio. So instead, finance site AskMoney’s post on building credit states it is best to pay your dues on time every month. While you can pay just the minimum due, it’s better to pay more if you can so you’re able to get rid of the debt. Consistently paying off your debts will decrease your utilization ratio and lower your card balance, which will boost your credit score.

Closing a credit card account will help your credit score

It may make sense to close an account you’re not using, or an account that has incurred a lot of debt already to save your credit score. But as our ‘Does Closing a Credit Card Account Hurt Your Credit Score?’ write-up discusses, your credit score is made of many elements — such as payment history and length of credit history. Closing an account will reduce your available credit without lowering your debt. This means you’ll be increasing your credit utilization ratio, which will hurt your credit score. If you do decide to close accounts, it would be ideal to cancel cards with an annual fee and not close the accounts before applying for loans.

Applying for a new credit card will be bad for your credit score

When you’re applying for a new card, you might be thinking that your score won’t be affected so long as you don’t use it yet. However, your score is impacted as soon as you get a new card. For one, a request will be made for your credit history, which will have a minor impact on your credit — meaning too many requests will look bad. But a better effect is that you’ll have a reduced credit utilization ratio because you now have additional credit available to you. Of course, this is assuming that you don’t incur any debt. Applying for a new card, as long as you don’t do so too many times, could bump your credit score up a bit.

Being aware of the misconceptions on credit cards means you’ll be able to change your credit card habits and eventually improve your score.