Don’t fall victim to these 10 credit card myths. Learn truth about your credit score and how to use credit card facts to your advantage.
Myth: If you pay your bills on time, you don’t need to check your credit reports.
Fact: Even those with responsible financial practices may have credit scores that aren’t perfect. Specific formulas are used to calculate your score, and if you use credit in a way that those formulas don’t like, your score will drop—even if the way you used credit was fiscally sound. For example, if you use a large amount of your credit limit each month but pay off the balance in full, your score will drop. One credit score factor is how much credit you use relative to how much credit you have available (known as your credit utilization rate). Having a high rate will hurt your score, regardless of your ability to pay off large balances each month.
Even if you follow every credit practice perfectly, you should still check your credit reports regularly to make sure there are no costly errors—an FTC study found that one in four consumers had identified errors on their credit reports that might affect their credit scores.
Myth: All credit scores are the same.
Fact: There are many different formulas used to determine credit scores, which can cause your score to vary significantly. Even if two different bureaus do use the same scoring system (usually Fair Isaac Corporation’s FICO score), scores can still be affected by the way each bureau records or stores your information. Also keep in mind that each piece of your credit history may not be reported to each bureau, so each bureau may have slightly different credit information on your report. It’s important to check your scores from all three of the major credit bureaus—TransUnion, Experian and Equifax—as you never know which score lenders will use. You can receive a free copy of each of these bureau’s reports once a year at www.annualcreditreport.com.
Myth: If you have a card with no limit, you can spend as much as your want without any damage to your score.
Fact: There is no such thing as a true “no limit” card. These types of cards are advertised as such because they have no preset spending limit, meaning that the card’s limit will change from month to month based on your spending and payment history. While the limits for these cards may be high, they do exist, and the card issuer will know what it is even if you don’t. As the agreement for prestigious credit card company states, “No Pre-Set Spending Limit does not mean unlimited spending. Purchasing power adjusts with your use of The Card, your payment history, credit card record and financial resources known to us, and other factors.” That means that even “no limit” cards can be declined, and charging high amounts on your card can adversely affect your credit utilization rate (and, in turn, your score), depending on how your credit card company reports to the credit bureaus.
Myth: Checking your own credit will hurt your credit score.
Fact: Checking your own score will have no effect on your credit—in fact, it’s a credit best practice to regularly check your score. When a lender pulls your credit score to evaluate you, it’s called a “hard” credit inquiry and will likely affect your credit score. When you check your own score or a company pulls your score for marketing or data collection, it’s called a “soft” inquiry and won’t affect your score.
Myth: Paying off a late credit card payment will remove it from your credit report.
Fact: Although paying a delinquent payment will cause the accounts to show as “paid” rather than “outstanding” on your credit report, late payments will stay on your report for seven years. Payment history accounts for 35 percent of your credit score, so even one late payment can hurt your score. Although you can’t get rid of these late payments altogether, you can pay on time going forward. After a few months of consistent, on-time payments, you should see your score start to improve again.
Myth: Debit and credit cards have equal effects on your credit score.
Fact: Although they look the same and both provide ways for you to purchase goods, debit and credit cards function in very different ways. Debit cards draw money directly out of your bank account when you swipe them, while credit cards don’t charge you until your bill is due, relying on your credit to ensure that you’ll make the payment. Since you don’t need credit to be approved for or to use a debit card, they don’t affect your credit score.
Myth: You have to carry a balance on your card to have a good score.
Fact: The data that creditors receive will show only your statement balance each month. Creditors have no way of knowing whether you’ve carried this balance from month to month or just accrued it in the last month, so carrying a balance from month to month won’t help your score. In fact, it can do the opposite. Carrying a balance will leave you subject to interest rates, causing you to build debt on top of existing debt, which can be dangerous for your score.
Myth: The best way to avoid a bad credit score is to not use credit.
Fact: Credit itself isn’t a bad or dangerous thing; it’s the way you use it that can get you into trouble. In fact, credit can help you be eligible for mortgages and car and tuition loans, and having good credit can give you access to better interest rates, lower insurance premiums and even lower utility fees. You need some form of credit history to establish a good score, and if you don’t establish credit, your score will be worse than someone with a long history of responsible use.
Myth: You should never close old accounts, as this will shorten your credit history and wreck your score.
Fact: While it’s true that FICO scores take into account how long your accounts have been open and how long it’s been since you last used them, closed accounts still remain on your credit report for several years. If you decide to close all of your older accounts, they will eventually fall off your credit report and significantly lower your credit history, which can lower your score, but this will take 7-10 years. During this time, you may open new accounts and start building history with those accounts or continue to build good credit so that past cards being removed from your account won’t be as big of a deal. The bigger issue is what closing old accounts will do to your credit utilization rate, as it will lower the amount of credit you have available while the amount of credit you’re using will stay the same.
If you’re paying fees to old accounts but never using them or you simply want to consolidate your cards, closing an account isn’t the worst thing. Just consider the effect it may have on your score due to reduced credit utilization, and plan accordingly. If you are planning on applying for credit in the immediate future, it may be a good idea to wait to close old accounts until after you are approved.
Myth: Your credit score is a number that represents how financially savvy you are.
Fact: Creditors use your credit score to assess how trustworthy you are with credit—but that doesn’t mean your credit score is a measure of how trustworthy you are in your daily life, or of how financially knowledgeable you are. People can get into bad credit for many reasons, such as medical emergencies or other unforeseen circumstances. Beyond that, the way credit scores are determined may not always mesh with your financial lifestyle—so it’s important to learn how to adjust your credit practices accordingly. Remember that although you may have established financially sound habits for yourself that include budgeting, paying your bills on time and avoiding debt, you might still not have a perfect credit score. It’s important to establish not only valid financial habits, but valid credit habits as well—and that starts with letting go of all 10 of these myths.