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When it comes to credit cards, people sometimes don’t know what to believe. Unfortunately, having the incorrect information about credit can cost you thousands of dollars throughout your lifetime.
Here is the truth behind some common misconceptions about credit cards and your credit score.
Keeping a balance on your credit card is helping your score
Thinking that keeping a balance on your credit card is beneficial to you is probably one of the most common myths I hear. This is completely false.
One of the major components of your credit score is your utilization ratio, which just means the percentage of your credit used out of your total credit limit. The larger a balance that is kept each month, means the higher utilization ratio you will have. As a rule of thumb, it is recommended to keep your utilization below 30% and even better if you can keep it below 10%.
Credit bureaus (Experian, TransUnion, Equifax) want you to have a low credit utilization because it shows them you are low risk and can pay off your bills.
Next, if you keep a balance every month, you will be paying very high interest (up to 30%). In order to avoid paying unnecessary fees, only put what you can afford on your credit and pay off in full every month.
Opening a new credit card will kill my credit score
Another big misconception is that your credit will tank, but this is false. When you open a new card, it may impact your score but it will be relatively minimal. It will likely only drop 5-10 points on average.
However, it can impact your average age of credit if you are relatively new to credit. Another big component of your credit score is the age of your credit. Credit bureaus calculate your age of credit by taking the average of the ages of all of your lines of credit, so as you open new cards this can be impacted.
When you do open a new credit card, there are some benefits to offset the impact to your credit age. You’ll likely get an increase to your total credit limit which will help you keep a lower utilization ratio. Additionally, it will help diversify your types of credit.
Checking your credit report will damage your credit score
Another major myth is that checking your credit report will damage your credit score, but this is false. Unlike when a lender is pulling your credit, when you personally pull your credit it results in a soft inquiry. While hard inquiries will cause your credit score to dip, a soft inquiry has no impact on your credit score.
According to federal law, you are eligible to receive a free credit report one time per year by each of the credit bureaus. You can request your free credit report at annualcreditreport.com
If I don't need to take out debt, then my credit score is irrelevant
Another popular misconception is that if you don’t plan on taking out a loan, you don’t need a good credit score. This couldn’t be farther from the truth.
Although the major uses for credit are to have a mortgage or another major loan, there are many other reasons to keep a good to excellent credit score.
Here are some of the many reasons to maintain your credit:
- Starting a new job – When you start a new job, they will usually run a background check before you get hired and can see your credit report. Unlike your lender, your employer won’t be able to see your score but will be able to see the full report.
- Searching for an apartment – Before you sign a lease, the landlord will likely run a background check to see your credit. They use this as a baseline to see if you will be a risk to pay your rent in full and on time.
- Utilities – Utility companies will usually check your credit because they are basically loaning you their service in exchange to bill you later. If you have a lower credit score, you may be deemed “risky” and may have to leave a deposit
In conclusion, understanding how credit works can be complicated but it doesn’t have to be.
Here’s what you should know:
- When it comes to your credit, make sure you are paying on time and in full to avoid paying interest
- Opening new lines of credit won’t have major impacts to your credit score
- Checking your credit report won’t hurt your credit score
- Even if you don’t need a loan, it is crucial to have a good credit score
Got any other myths about credit cards? Let me know in the comments
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