7 common credit card myths debunked
We're getting after the facts.
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You may not have gone over your credit card agreement with a fine-tooth comb—but you're not alone. In a CreditCards.com survey, nearly half of 1,000 cardholders admitted they didn't look over the terms and conditions.
Furthermore, 37% of cardholders disclosed in another poll that they weren't sure how their credit score was calculated.
So, a lot of us could probably use a refresher on practicing healthy financial habits. After all, preserving your credit score should be a priority—it can be used to decide whether you get approved for loans, household utilities, even apartments or jobs.
Read on to learn about several common misconceptions when it comes to credit cards so you can swipe confidently.
Myth #1: You need to pay off your whole balance to have a good credit score
Your payment history is the most important factor that makes up your FICO score, accounting for 35%. Another 30% of your score is determined by the amount you owe in relation to your credit limit—known as credit utilization.
“With this in mind, you do not have to pay your credit card balance in full to have a good score,” says certified financial planner Jeff Rose, CEO of Good Financial Cents in Nashville, Tenn. “You do, however, need to pay your credit card bills early or on time each month, and maintain a reasonable level of utilization.”
Set an alert or automate payments to make at least the minimum amount. And if you’re using a higher level of credit, try to pay a little more. Rose and other financial experts suggest keeping your credit utilization below 30%. This means carrying a balance of $3,000 or less for every $10,000 in available credit you have.
Myth #2: You should close old accounts you're not using
The length of your credit history makes up another 15% of your FICO score, and longer credit histories improve your score. Because of this, Rose recommends leaving accounts open as long as you can. “Older accounts can increase the average length of your credit history whether you’re using them or not,” he says.
You should also keep in mind that closing an account will lower the amount of credit you have available, which in turn affects your credit utilization ratio. If you have a $10,000 credit limit and carry a balance of $3,000, you're within that range Rose and experts recommend. Should you close an account with a $2,000 credit limit, you're suddenly above that benchmark, and that will be reflected in a lower credit score.
Myth #3: If you have too much credit available, it shows you're too risky
If you have a history of overspending or mismanaging money, having access to multiple credit cards could be a slippery slope. But if you’re responsible, having a high line of credit typically means you’re keeping your credit utilization low. Again, the amount you owe in relation to your total credit line makes up nearly a third of your FICO score. “In fact, creditors actually see open credit as a major positive since it means you’re not desperate for credit or maxing out your accounts,” Rose adds.
Myth #4: You have to use your credit card every month
If you were to set aside your credit card for a month or two, your credit score will likely stay intact. So is it mandatory? No.
But using them can absolutely help. If you make small purchases on your card each month and pay your bill in full, Rose says your movements will be reported to the three credit bureaus (Experian, TransUnion, and Equifax). “Over time, these movements will help beef up your credit history and improve your score,” he says.
On the other hand, it's a possibility that a credit card issuer will close your account due to inactivity after a period of time, which can affect your utilization ratio and credit score. And if you do hold off on making purchases, keep regular tabs on your accounts to be cognizant of fraud and outstanding fees.
Myth #5: You don't rack up interest if you have a 0% APR card
Always read the fine print before applying for credit. “If you sign up for a card that offers 0% APR on purchases for a limited time, this can absolutely work as an ‘interest-free loan.’ All you have to do is pay off your entire balance before the 0% APR introductory offer ends,” Rose says.
If you do carry a balance beyond the promotional period, the remaining amount will be subject to the variable APR your issuer charges, often a hefty interest rate. In particular, Rose says to be cautious about offers with deferred interest.
Not exactly sure what that is? Neither do 82% of Americans, according to a WalletHub survey.
“With deferred interest, you typically have to pay back interest on your entire balance if you didn’t pay it off before your introductory offer ends,” he explains. “Deferred interest offers are popular when you opt for in-house financing of large items like appliances or furniture, but they’re not common at all among traditional credit cards offered by big banks.”
To be safe, set a reminder so that you know when the promotional period ends.
Myth #6: You need to be 18 years old to have a credit card
Some credit card issuers, such as Bank of America, Capital One, and Chase, don't impose age restrictions when it comes to adding an authorized user to your account. However, some do set requirements; American Express restricts the age of an authorized user to 13, while Discover restricts the age to 15.
According to Rose, if you want a credit card without a cosigner, you will need to prove you have the ability to repay the amounts you borrow according to credit card law. And if you want to be approved for a credit card of your own, you do have to be at least 18 years old.
Myth #7: Medical debt will immediately impact your credit score
When medical expenses quickly add up, it can be hard to get a handle on these debts, especially when facing health challenges. If you’re among the 26% of Americans who struggle paying medical bills and you’re worried about damage to your credit score, the first course of action is to reach out to providers to negotiate a payment plan. Most will do their best to assist, and some may offer a discount if you pay within a certain time frame.
“If you need to repay your medical bills over a long stretch of time and the payment plan offered by your provider won’t work, then you can also consider consolidating medical bills with a financial product like a personal loan,” Rose says.
“Medical debt will not necessarily impact your credit score provided you have negotiated a payment plan with the medical provider and you’re making all the required payments early or on time,” he explains. On the flip side, Rose cautions that medical debt can hurt your credit score if you stop making payments and your account is sent to collections.
Be an informed consumer. Credit cards offer benefits like extended warranty protection, lucrative rewards, and cost-saving opportunities like 0% intro APR, but mounting debt, high interest charges, and other problems can arise without responsible use.
Make sure you read any credit card offer's fine print before you sign up so that you clearly understand the implications of the new account. And brush up on things like how to check your free credit report and how your score is calculated so you can practice healthy financial habits.