Even with so much accurate information readily available online and off, there are still some persistent myths about credit card use. From the wisdom of closing old accounts to misconceptions about how balances affect credit scores, there are plenty of myths surrounding the use of credit and debit cards.
Some of these credit card myths are harmless, while others can actually damage your financial life. Here are some of the most persistent credit card myths, and the truth behind them.
Myth #1- Carrying a Balance is the Best Way to Establish Your Credit History
This is one of the most harmful myths about credit card use, and certainly one of the most dangerous. Carrying a balance when you do not have to is just plain bad, and totally unnecessary.
The truth is that charging items and paying your bills on time will help you establish a credit history over time. Carrying a high balance could actually lower your score, since credit reporting agencies look at the amount of available credit you have already used.
Myth #2- It is Best to Close Old and Unused Accounts
Once again, this myth is not just untrue but actually harmful. Closing a long-established credit card account will actually lower your FICO score, since the age of your accounts is a factor in establishing your creditworthiness.
Closing an old credit card could reduce the length of your credit history and cause your FICO score to suffer. If you have accounts you no longer use, cut up the physical cards or store them in a safe place, but do not actually close the accounts.
Myth #3- Using a Debit Card will Help Me Establish Credit
This myth is not necessarily harmful, but falling for it will delay the establishment of your credit history and the building of your credit score. Many people think that credit and debit cards are both good for building credit, but they actually work very differently.
When you pay with a debit card, the money is pulled straight from your account, so there is nothing to repay. That means that you could use a debit card every day and still riot build your credit history. If your goal is avoiding debt, using your debit card may be a good choice. If you can control your spending and need to establish a credit history, pull out your credit card instead.
Myth #4 — I Can Carry a High Balance as Long as I Pay My Bill on Time
Carrying a high balance on your credit cards and using a significant portion of your credit limit can harm your FICO score even if you pay your bill on time. In fact, a high level of credit utilization each month could lower your score even if you always pay the full balance. That is because the credit utilization ratio is a big part of your overall FICO score. If you have a $5,000 limit on your card and routinely rack up $3,000 bills, that high credit utilization ratio could be very bad for your FICO score.
Falling for untruths is always a bad thing to do, but believing myths about credit card use could be devastating to your financial life. Understanding the truth about credit cards, credit scores and financial reality is the best way to steer clear of debt and avoid unforeseen problems.