There can be a lot of confusion around the best ways to use a credit card and what it might mean for your credit score and financial future.
In this blog, we’re busting five big credit card myths so you feel ready to make good financial choices and start building credit wisely. Check it out:
Myth #1: Applying for a new credit card really hurts your credit score.
Part of a credit card application is a “hard inquiry” into your credit. These inquiries are done by issuers or lenders and stay on your credit history for about two years, though they probably won’t affect your credit score for that long.
One hard inquiry could temporarily lower your credit score by a few points, but is unlikely to make a big difference. However, applying for multiple loans or credit cards, especially in a short period of time, could hurt your credit score long-term. Just like everything when it comes to credit cards, moderation is key.
Myth #2: You need to carry a balance to build credit history.
Carrying a balance is often seen as a good way to build credit. In truth, it doesn’t particularly help and can cause you to accumulate debt. After all, it can be hard to limit just how high a balance you're carrying.
If it's possible for you, paying the full balance consistently is much better than carrying one. The best strategy is to regularly use your credit card for manageable purchases and pay it off in full every month. This keeps your debt-to-credit ratio low.
Debt-to-credit ratio, or credit utilization rate, is the percentage of available credit you’re actually using. You can find it by taking your credit card debt and dividing it by your credit limit. The more of your credit limit you’re using, the lower your credit score will be. That's why keeping a balance--especially a high one-- on your credit card isn't a great strategy.
Myth #3: A high credit limit is a bad thing.
People are often scared of higher credit limits. They see it as more opportunity to encounter financial trouble and assume raising their credit limit will negatively impact their overall financial wellness.
However, a higher credit limit without increased spending means a lower debt-to-credit ratio like we mentioned before. This means a credit line increase isn’t a bad thing. After all, just because you have more room to spend doesn’t mean you have to.
If you need help building a financial plan that keeps your spending on track, check out free financial counseling.
Myth #4: Paying on time isn’t a big deal.
Late payments have a pretty large impact on your overall credit score. In fact, your payment history is the biggest contributor to your credit score overall. Not to mention, late payments can come with fees and penalties.
Also, note that paying less than the monthly minimum payment is still considered a missed payment. While it's ideal to strive for paying off your credit card in full each month, it's important to at least make the minimum payment.
Keep in mind that if you're under 30 days late for one payment, and you're never or rarely late, you can call your financial institution and ask about late fee forgiveness opportunities.
Myth #5: Credit cards are only for emergencies.
While credit cards can be helpful in covering emergency costs, that’s not their only use. Most importantly, they’re an excellent way to build credit for young adults and others getting started on a new financial path.
Consistently using your credit card—and paying it off—is a great way to build good credit. They can be a great tool in helping you prepare a financial history that shows lenders you’re trustworthy.
While everyone’s financial wellness journey is different, many people can find more benefits in a credit card than downsides. The fact of the matter is, credit cards can be great financial tools with responsible use, on-time payments and a focus on establishing credit.