Your credit score is one of the most important numbers in your financial life. It influences your ability to secure loans, credit cards, and even affects the interest rates you’ll pay. Despite its importance, many people are often misinformed about how their credit card usage impacts their credit score. There are numerous myths surrounding credit scores that can lead individuals to make mistakes that hurt their financial standing.
In this article, we’ll debunk common myths about credit cards and their effect on credit scores, and provide clear insights on how your card usage really impacts your rating.
1. Myth: Closing Old Credit Cards Will Improve Your Credit Score
One of the most widespread myths is that closing old credit cards will automatically improve your credit score. The idea is that fewer cards mean less risk, but this isn’t necessarily true.
The Truth:
- Credit History Length Matters: One of the factors that make up your credit score is the length of your credit history. Older accounts help increase the average age of your accounts, which can positively affect your score. Closing an old credit card could lower the average age of your accounts, potentially hurting your credit score.
- Credit Utilization Rate: When you close a credit card, you reduce your total available credit. This can lead to an increase in your credit utilization ratio (the amount of credit you’re using compared to your total credit limit), which may negatively impact your score. A higher utilization rate is seen as risky by lenders.
Tip: If you’re not paying an annual fee or actively using an old credit card, it’s usually better to keep it open. If you must close it, try to reduce your overall debt to maintain a healthy credit utilization rate.
2. Myth: Checking Your Credit Score Will Hurt Your Rating
Many people worry that checking their own credit score will negatively affect it. This myth likely stems from the confusion between soft inquiries and hard inquiries.
The Truth:
- Soft Inquiries: When you check your own credit score or when a company checks it for promotional purposes, it’s considered a soft inquiry. Soft inquiries do not affect your credit score at all.
- Hard Inquiries: On the other hand, when you apply for a credit card, loan, or mortgage, the lender conducts a hard inquiry. This can cause a small, temporary dip in your score, but the effect is usually short-lived if your finances are in good shape.
Tip: Regularly checking your credit score through your bank or credit card issuer will not harm it. Many services also offer free access to your score, helping you stay informed.
3. Myth: Carrying a Balance on Your Credit Card Improves Your Credit Score
There’s a common misconception that carrying a balance on your credit card, rather than paying it off in full, is a good way to boost your credit score.
The Truth:
- Credit Utilization: Your credit utilization ratio (the ratio of your credit balance to your credit limit) is a major factor in your credit score. Carrying a balance doesn’t improve your score. In fact, it can hurt your credit score if your utilization is too high.
- Interest Charges: When you carry a balance, you’re likely to accrue interest, which adds to your debt. High balances and interest charges can hurt your overall creditworthiness.
Tip: The best practice is to pay off your credit card balance in full each month. This helps keep your credit utilization low, avoids interest charges, and shows that you’re responsible with credit.
4. Myth: Paying Your Bill on the Due Date is Fine
Many people believe that paying their credit card bill on the due date is enough to maintain a good credit score. However, this is not always the case.
The Truth:
- Reporting Dates: Credit card issuers report your credit card balance to the credit bureaus at a specific time each month, often just before or after your due date. If you pay your balance on the due date, but it’s still high when the issuer reports it, your credit utilization ratio may still appear high, which could negatively affect your score.
- Late Payments: If you miss the due date, even by one day, your payment may be considered late, which can lead to late fees and a negative mark on your credit report. Late payments typically stay on your credit report for up to seven years.
Tip: Try to pay off your credit card balance before the reporting date to keep your credit utilization low. This ensures that your account shows a lower balance when reported to the bureaus. Setting up automatic payments a few days before the due date can help avoid late payments.
5. Myth: Having a High Credit Limit Will Hurt Your Credit Score
Another misconception is that having a high credit limit is detrimental to your credit score because it makes you look like a high-risk borrower.
The Truth:
- Credit Utilization Benefits: A higher credit limit can actually be beneficial. When you have more available credit, your credit utilization ratio decreases (assuming your spending stays the same). A lower utilization rate is seen positively by credit scoring models.
- Credit Risk: Having a high limit doesn’t mean you’re more likely to max out your card. If you use your credit responsibly and maintain a low balance relative to your available credit, it reflects positively on your credit score.
Tip: Ask for a credit limit increase if you feel confident that you can manage your spending. This can help lower your utilization rate, which can, in turn, boost your score.
6. Myth: All Credit Cards Affect Your Credit Score the Same Way
Not all credit cards are created equal, and not all credit cards affect your credit score in the same way.
The Truth:
- Type of Card: Some credit cards, like secured cards, are specifically designed for individuals with poor or limited credit histories. While they can help build credit, they may not have the same positive impact as a traditional, unsecured card.
- Rewards and Benefits: Premium credit cards with large annual fees may have different scoring impacts, especially if you’re tempted to overspend in order to earn rewards. On the other hand, store cards often come with higher interest rates and may not help as much with building credit.
Tip: Choose a credit card that suits your financial situation. If you’re just starting out, a secured card or a low-interest card may be a better option to help you build credit.
7. Myth: Closing a Credit Card Will Immediately Drop Your Credit Score
While closing a credit card can affect your credit score, it doesn’t necessarily cause an immediate drop. Many people believe that the moment they close an account, their score will plummet.
The Truth:
- Credit Utilization Impact: Closing a card can hurt your score by increasing your credit utilization ratio, especially if it reduces your total available credit. However, the drop isn’t instant and may take some time to show up on your score.
- Short-Term vs Long-Term Impact: While the immediate impact may not be severe, the long-term effect on your credit score can be negative if it significantly affects your credit utilization ratio or the length of your credit history.
Tip: If you do decide to close a credit card, make sure it’s for a good reason (e.g., high fees or poor customer service), and try to maintain low balances on your remaining accounts to keep your credit utilization low.
Conclusion
There’s a lot of confusion surrounding credit scores, especially when it comes to how credit cards affect them. Understanding the truth behind common credit card myths is essential to maintaining a healthy credit score. The key is responsible card use: paying your balance in full, keeping your credit utilization low, and making timely payments. By debunking these myths, you’ll be better equipped to manage your credit and build a solid financial foundation.