8 credit myths that could be costing you money

Credit cards are a valuable tool for many Americans. They can help you develop financial discipline, manage responsibilities, earn rewards, and much more if you use them wisely. Unfortunately, people often do not know how to use credit cards wisely. Worse yet, many people fall prey to myths about credit cards that can harm their credit scores and cost them money. While there’s a lot of available information, it’s easy to believe myths about credit that can hinder you. This guide shares eight things about credit cards that many people may not realize.

Carrying a balance improves your credit score

A common misconception people have about credit cards is that regularly carrying a balance improves their credit score. In fact, carrying a credit card balance does not improve your credit score and can lead to accumulating credit card debt. This is one of the oldest myths about credit scores, dating back to the idea that repaying a loan, such as a car loan, can cause a minor drop in your credit score. In reality, this is not the case for credit cards.

The truth

Carrying a balance on your credit card can actually lower your credit score. And, it can cost you in the form of unnecessary interest charges and possible fees. Credit scores reward users with low credit utilization ratios rather than those with carried-over interest.

Credit utilization ratios measure the percentage of your available credit you’re currently using. For example, if you have a total available credit of $10,000 across two cards and $4,000 in combined indebtedness, your ratio is 40%. On-time payments and the amount you owe are the two biggest components of a credit score. Creditors typically want to see people with utilization ratios of 30% or less.

Paying off your balance in full each month demonstrates responsible usage to creditors and traditionally results in a healthy credit score. Paying only the minimum payment will not help you avoid interest charges or improve your credit score; it’s best to pay the entire balance each month to protect your credit and avoid unnecessary costs.

Closing old credit cards boosts your score

If you have a lot of available credit, you may ask yourself ‘Should I cancel old credit cards?’ and have someone tell you that closing a card will help your credit score. Fewer cards result in better credit, right? That’s incorrect. Fewer credit cards do not automatically equate to better credit. In fact, closing an old account can reduce the average age of your credit accounts, which may negatively impact your credit score. However, having access to lots of credit may be tempting for some individuals. In that case, it may pay to close a credit card to avoid the potential of going into debt.

The truth

Closing an old credit card account can impact your score in multiple ways. First, closing a credit card account can increase your utilization ratio. For example, if you have $100,000 in available credit across multiple cards and close a card with a $20,000 limit, your available credit drops significantly, which increases your utilization.

Second, closing cards, especially older ones, can shorten your credit history and negatively impact your score, as credit history is a key component of your credit score. One exception to this rule is if you have a card with high fees or poor rewards; in that case, analyze the potential impact first.

If you don’t want to cancel the old credit card, keep it open and use it for a small, recurring charge and pay it off monthly.

 ➤  SEE MORE:Should you cancel credit cards you no longer use?

Applying for a credit card lowers your score

One of the more common credit score myths is that applying for a new credit card will drastically lower your credit score. When you submit a credit application, it results in a lender check, which is a hard credit pull. This hard credit pull can temporarily lower your credit score, but the impact is not as dramatic as many fear.

A hard credit pull occurs when a lender checks your credit as part of the credit application process.

The truth

Whenever you apply for a new credit card, a hard inquiry goes on your credit report. This does cause your credit score to drop temporarily, but it’s a natural part of the credit process. Beyond that, the credit impact is commonly only a few points, and those typically return within several months.

Moreover, your credit score may actually improve once the card is reported to the credit bureaus, thanks to an increased credit utilization ratio. Just make sure not to apply for too many credit cards within a short timespan, as this could negatively impact your credit or result in a declined application. Keep in mind that different lenders, including auto lenders, may use various credit scoring models when evaluating your credit application.

 ➤  SEE MORE: How many credit cards should you have?

Credit repair companies can fix your score fast

A simple internet search for credit repair companies may reveal numerous firms claiming they can quickly fix your credit score. Some may even promise to effectively erase your bad credit history. Unfortunately, this is one of the most common credit repair myths, and it’s false.

If you find errors on your credit report, you can dispute them yourself. Under federal law, you are entitled to a free credit report from each of the major credit reporting agencies annually. This allows you to review your credit information from all three agencies and ensure its accuracy.

The truth

It takes time and effort to legitimately improve your credit. A credit repair agency can help you dispute a genuine error on your credit report, but that’s something you can do yourself for free. An agency also can’t remove negative information from your credit report.

The best way to fix your credit is to focus on good habits, such as making on-time payments, avoiding new lines of credit, reducing your debt, and analyzing your credit report for errors. Building a strong credit history through responsible credit management is the most effective way to improve your credit score over time. You can do all of these at no cost. Although such practices won’t improve your credit score overnight, it should increase over time.

If you really need help managing your debt, consider a non-profit credit counselor. They can help you establish a budget and possibly negotiate lower interest rates on your cards, for a significantly lower cost than a credit repair agency.

Marriage merges your credit history

Marriage can be a beautiful thing, and spouses can potentially become responsible for each other’s debt after tying the knot. In a community property state, spouses may share responsibility for debts incurred during the marriage, which can impact credit considerations. As a result, many people believe that their credit histories automatically combine after saying ‘I do.’ That is simply not the case, and it’s one of the more popular credit myths.

If you and your spouse apply for a joint loan, such as a mortgage or other shared credit accounts, the loan will appear on both of your credit reports and affect both of your credit scores.

The truth

Although many things combine between spouses at marriage, each person maintains their respective credit scores. Credit reports don’t reflect marital status, so personal accounts and payment history don’t merge with your spouse.

Keep in mind, this doesn’t apply to joint accounts. Co-signed loans or shared credit cards will appear on both credit reports, and the creditor will consider both credit profiles before making a decision. Ultimately, your overall history remains separate.

It can be helpful for both partners to review each other’s credit reports before combining finances, as it can show where they stand individually.

Credit cards always come with high fees

It’s easy to believe that all credit cards carry high fees. After all, there has been significant growth in the premium rewards credit card space, with annual fees hitting well over $500. Aside from potential late fees, that doesn’t mean all credit cards come with exorbitant fees.

The truth

Realistically, not all credit cards come with high fees. Yes, it is possible to sign up for a rewards card that includes an annual fee, but those often come with rewards that for the right user, can outweigh the annual fee.

That’s not to say that all credit cards include expensive annual fees. There are numerous no-annual-fee credit cards available that you can obtain without incurring any unpleasant costs just to carry them. If you prefer a no-annual-fee card, compare the top options to identify the right card for your needs.

One of the most well-known credit card facts is that paying your monthly bill on time is the best way to use credit. Carrying a balance is a sure-fire way to incur interest charges and possible late fees. If you don’t typically carry a balance, the only fee you may face is an annual fee.

 ➤  SEE MORE:What are the best annual fee credit cards?

Checking your credit score lowers it

The credit scoring system is far from perfect, but that doesn’t mean that viewing or checking your own credit score harms it. Checking your own credit score is considered a soft inquiry and does not impact your credit. Yes, your credit report takes a minor hit when you have a hard inquiry, but that’s vastly different from checking your own credit.

The truth

Your credit score plays a key role in your overall financial health. Checking your credit is actually a good thing to do, and it has zero impact on the health of your credit.

In fact, regularly checking and reviewing your credit report and score is a good practice. Doing so allows you to monitor your profile to verify that there are no errors or fraudulent activity. This can be particularly helpful before applying for a new loan or credit card, as it ensures your credit is in good standing.

There are many free resources to check your credit score. Banks often extend this feature as a perk to account holders, as do many credit card issuers. If you want to view your full credit report, you can request a free one annually from all three reporting agencies via AnnualCreditReport.com.

High income equals a high credit score

It’s reasonable to think that having a higher income equals having a better credit score. While understandable, there’s zero connection between income and credit scores—credit scoring models do not consider your income when calculating credit scores. Instead, calculating credit scores relies on factors like payment history, credit utilization, and account age.

The truth

Credit reports don’t show your salary; they show your debts and account limits. Scoring models consider your credit behavior when calculating your credit score. This includes factors such as payment history, utilization, credit mix, and length of credit history when determining your score, rather than your income.

If a higher-income American has a poor credit history and less-than-stellar payment habits, their credit score will not be good. Alternatively, if a person with a modest income makes timely payments and doesn’t carry a balance, their score will likely fall within the very good or excellent range.

In short, your credit score is reflective of your behavior, not income. If you wisely manage your credit, your score will reflect it, regardless of your income.

 ➤  SEE MORE:What is a good credit score?

Conclusion

Most credit card myths sound somewhat reasonable, but it’s important not to be misled by them. Being led astray can cost you money and hurt your credit score. Disciplined use of credit cards can build financial strength and position you for the best rates possible when you need to borrow money. If something sounds amiss to you about credit cards, perform due diligence to determine whether or not it’s true and protect yourself in both the short- and long-term.