Make sure you’re getting these right.
Credit cards are one of those things that people think they know, but don’t actually understand. And if you’ve got a blind spot, you might be making some expensive mistakes. A surprising number of Americans struggle with basic credit card concepts . On issues ranging from credit scores to revolving debt to rewards cards, many borrowers displayed an incomplete and often inaccurate picture of how credit works. Credit cards, like any financial product, seem to create a certain amount of anxiety for people. There are myths and rumors running rampant about how to spend on a card, when to pay it off and whether or not to even have one. Unfortunately, some of these credit card myths may be causing your wallet – and your credit score – more harm than good information .
Getting your first credit card can be an important part of establishing your credit history. If you pay off your balance in full every month and make on-time payments, a credit card may be a useful tool. However, there’s a lot of misinformation about credit cards that could cause you to wreck your credit if you’re not careful.
Few important points has been discussed here. Closing a credit account can harm your score in two ways, however. You’re reducing the amount of credit available to you, and thus — assuming you don’t change your spending — increasing the share of available credit you use. (This is your so-called credit utilization ratio, which influences 30% of your FICO score.) At the same time, you are decreasing the average age of your accounts; the length of your credit history determines 15% of your score. Perhaps one reason people are inclined to close old cards is that more than 90% of respondents think the number of cards you own impacts your credit score.
A majority of borrowers (54%) are under the impression that carrying a monthly debt burden improves their credit score.
This is just plain wrong. Carrying a balance will simply cost you money. Pay your cards off each month.
About 27% of the survey’s respondents said that it never makes sense to pay an annual fee for a credit card, while 14% said it only makes sense if the fee is waived for a year — and another quarter said they just weren’t sure about them.
What’s more accurate, however, is that you should never pay an annual fee without making sure the rewards you would get from the card outweigh the yearly cost. And many spenders are leaving hundreds, if not thousands, of dollars on the table.
There is a common misconception that carrying a credit card will ultimately lead to damaging credit card debt. Sure, some people don’t understand how to handle credit cards – or have personality types (looking at you present hedonists), that result in maxing out any credit limit.
However, for the responsible individual, a credit card offers one of the easiest ways to establish and build credit history. Prepaid cards and debit cards do nothing to help establish credit history.
Instead of just listening to scare tactics, consider your time perspective (which you can test here), responsibility levels and history with debt. If you’re the kind of person who always handed homework in on time, never misses an appointment and understands how to budget – well you can probably handle a credit card.
Only have one credit card
This myth is linked with the notion that people can’t have a credit card in their wallets without incurring debt. This is valid for some, but not everyone.
If you feel you can’t handle paying off credit card bills on multiple credit cards because you’ll either a) forget b) rack up too many purchases or c) get overwhelmed, then stick with one.
For those who are organized, responsible and maybe like to take advantage of cash back rewards – then go ahead and get more than one credit card.
Don’t accept a credit limit increase
Get an offer to increase your credit limit? Yes, your lender is trying to lure you into a trap. But get this – you can use their trickery to your advantage.
To understand why, let’s recap how your FICO credit score works:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
“Amounts owed”, which accounts for 30% of your score, is also referred to as utilization: the amount of your credit limit you use. The more debt you have, the lower your score. The ideal utilization is 30% or less of your overall credit limit.
If one spouse has excellent credit, the other doesn’t need to worry since they can just use the other one’s score to apply for loans.
While there is no such thing as a credit score for couples, one spouse’s credit could affect the couple’s ability to get credit. For instance, in cases where one person could not qualify alone, credit reports and scores for both people are considered when couples apply for joint accounts or for a mortgage loan. They might be faced with higher interest rates, fees or even being denied on these joint accounts because one person has a poor credit history.
Good credit is tied to how much money a consumer has in the bank.
How much money consumers have in the bank doesn’t affect credit scores. A bank account does, however, affect credit scores if a consumer bounces checks and does not pay the money back. If the balance owed to the bank gets turned over to a collection agency, then that information will show up on a credit report.
Credit card debt is something to be ashamed of.
Nearly half of all Americans have credit card debt. Are half of all Americans ashamed? Of course not (Well maybe… if we’re talking about the Leafs.) Fact is, shame isn’t a useful emotion. Proud determination to get rid of that debt is.
Go for proud. It’s totally doable.