Accessing the internet from our smartphones, tablets, and laptops – virtually anywhere across the globe – has certainly made our lives easier.
With seemingly endless information available on the Web, however, comes a great deal of inaccuracies, including everyone’s favorite buzzword, “fake news.”
There’s a great deal of misinformation out there surrounding credit scores and credit cards. Believing some of these myths could wind up costing you a hefty amount of unwanted fees and hurt your overall credit score.
In order to put your best financial foot forward, it’s vital to do some research and know all the facts. To help you separate truth from fiction, here are some common credit card myths debunked.
Legendary Misconceptions About Credit Cards
Myth: Credit cards are dangerous, and you should avoid them (or else…)
The truth is, you’re way better off using your credit card vs. a debit card when paying for gas, groceries, etc.
That’s IF you’re fiscally responsible and can use your credit card wisely (a.k.a. spending only what you can afford to pay off each month).
Credit cards are a vital and effective means for building your credit history & boosting your credit score. Plus, most companies now offer cash-back, airline miles, signup bonuses, and rewards programs where you can trade points earned for a whole bunch of goodies.
Mortgages, car loans, and other lenders are looking to evaluate your credit history. Without one, you likely won’t qualify for a loan unless you bring on a co-signer.
Myth: Checking your credit score will cause your good credit to plummet
A simple check through sites like Credit Karma won’t negatively impact your score. Your credit score is only affected when a “hard” inquiry is made.
A hard inquiry refers to anytime someone requests a copy of your credit report as a part of your application for a loan, credit card, or other forms of credit. Checking on your own is considered a “soft” inquiry and will not have any effect on your credit score.
Myth: Close accounts you’re not using…why would you leave them open!?
Outrageous! The fact of the matter is, leaving your old credit accounts open can provide a number of benefits.
By keeping accounts open:
You’re ultimately increasing the length of your personal credit history, which is one of the main factors used to calculate your credit score.
Perhaps even more importantly, when you accumulate a large pool of credit that is not actively in use, it’ll help keep your credit utilization ratio low.
Myth: Your credit report is 100% accurate, 100% of the time.
That’s like saying the weather forecast is 100% accurate all the time, which we all know it isn’t. Did you know that as many as 1 in every 5 Americans have incorrect information on their credit reports?
There could be an inaccurate balance showing, a missed payment posted that you actually made on time, or an account on your report that you’re not liable for.
The good news is you are legally entitled to request a copy of your credit report from each of the three main credit bureaus once per year.
And, it’s highly recommended that you do so. This allows you to check for any inaccuracies and clean up false information that may be hurting your overall credit score.
Myth: Missed one payment? Don’t sweat it. It’s no biggie.
Wrong! The reality is, your payment history is the single largest factor used to calculate your credit score. Here’s the scary part: one missed payment (yes, just one) can remain on your credit report for up to seven years.
What’s more, it could cause your score to drop by more than 100 points short term. Seriously, can we get Daniel Powter over here because this is this perfect moment to hear him sing, “you had a bad day.”
Myth: You’ll have the same APR from when you first signed up for your card
Sorry to be the bearer of bad news, but your credit card interest rate can fluctuate throughout your ownership of the card.
People tend to overlook the fact that they were given an introductory APR when first signing up for their card. Some credit lenders, for example, will offer 0% APR for 12 months as an incentive to sign up with them. After a year, however, if you still carry a balance, or continue using that credit card, you’ll begin paying interest on it.
Moving beyond introductory APRS, interest rates can also change due to late payments. Many card issuers will tack on a penalty APR, which is typically around 30%.
Another way your interest rate can change is if your APR is attached to the prime rate.
In this instance, your issuer would supply you with a variable interest rate that would fluctuate in proportion to the prime rate. This is the interest rate that banks will offer to their most creditworthy clients.
Ultimately, this area is out of your hands.
Lastly, if your issuer considers you a high risk, they may decide to raise your APR as a way to protect themselves against missed payments or high balances.
Myth: Maxed out your card? Good thing there’s no penalty for that.
Incorrect! Everything has consequences. There’s a little something called credit utilization that comes into play here.
Credit utilization is the percentage of available credit you use each month, and it’s something that credit bureaus not only track but factor into your credit score too.
By maxing out your credit card and using 100% of your available credit, it communicates to creditors that you’re potentially a high lending risk.
This not only negatively impacts your credit score, but it can also result in higher interest rates and a tougher loan approval process should you apply for one in the future. Experts often recommend using a maximum of 30% of your available credit month over month.
Well, there you have it! We have just debunked several common credit card myths. Now that we’ve put those to rest, you are equipped with the knowledge needed to properly use your credit card and manage your credit. A little retail therapy is good, but just don’t get in over your head!
Being financially responsible can greatly improve your life and help you achieve the future you’ve always envisioned for yourself.