It used to be that credit card got a bad reputation simply because the perception was that if you used a credit card you didn’t really have the money at the time and were putting the charge on a card and worrying about it later. While that may have been true for some, most others like the fraud protection that credit cards offer, not to mention the rewards that can add up simply by using the card for normal purchases that you would make anyways. While there are plenty of pros to using a credit cards, there are still a few myths that follow around a credit card that easily need to be put to bed for good.
Having One is Unnecessary
Sure, you could get by without one, paying cash and using a debit card, in fact you probably would stick to your budget a little better since using cash actually makes you think about purchases a little more instead of swiping your credit card, but actually having one is necessary. By making charges throughout the month and paying the statement balance by the due date, you are creating a solid payment history and use of the card, that you can build on to build up your credit score, which is important in just about every way in your financial life, which we will get into a little later.
Carrying a Higher Balance Helps Your Score
While it is important to use and payoff the account regularly, having a high balance will only decrease your credit score as you reach your credit availability ceiling. When it comes to your credit score, according to MyFICO.com, 35% is based off of payment history, 30% credit utilization (amount owed vs. limit), 15% length of credit history, 10% new credit, and 10% others factoring into your mix of credit. So, if you are utilizing most or all of your credit availability it will significantly lower your credit score.
Refuse a Credit Limit Increase
Piggybacking off of the higher balance helps your score topic comes the idea of refusing a credit limit increase. While the extra credit line increase could give you more incentive to charge up the account that much money, you certainly should not, and by accepting the line increase, you are freeing up even more of your credit utilization, which will increase your score, provided you do not continue to have the balance climb toward your limit. If you are offered an increase, it can do nothing to impact your score negatively, unless you do the damage to yourself by spending.
Opening One Will Hurt My Credit Score
Yes, 10% of your score is based off new credit, so having your credit pulled for a new credit card will lower your score, but only a few points as we’re talking one inquiry, not multiple applications you’re looking at. If you find the right card, you won’t have to worry about opening up another and a short two years away the inquiry will fall off your credit report.
A High Credit Score Doesn’t Matter That Much
This is probably the myth that is the most out there, considering if you want to buy (or even rent) a house, lease a car, purchase insurance, credit score is the first thing that a lender will review to see if you are worthy for approval. Even these days a potential employer can look at credit score and factor in the reasoning for employment. I guess the idea is that if you have a poor credit score there could be underlying issues, which is probably true, if you can’t manage your own finances, maybe it could leak into not performing your job responsibilities up to standard. In order to take advantage of the best interest rates on the market you need the best credit score, so any increase in your score just means saving more money, so that should be all the motivation you need to look to continuing to improve your credit score.
As Long as I Make the Minimum Payment on Time
Now while making the minimum payment on or before the due date will satisfy the monthly bill, it will do little to chip away at the balance, and if you continue to make the minimum payment your history will look good, but credit utilization will not improve as making the minimum payment will only take away from the principal balance very little and could take decades to finally get rid of the balance, along with having paid probably thousands upon thousands in interest.