Originally posted on https://bonsaifinance.com/8-popular-credit-card-myths-land-serious-trouble-lc/
It’s estimated that there are roughly 1,895,834,000 credit cards currently in use in the United States.
When there are over one billion credit cards in use you’d think that people would be better informed about them. But there is a surprising amount of misinformation about credit cards in the public conscious.
Believing credit card myths as facts can affect you negatively financially.
Learn how to separate fact from fiction and know the truth about credit cards. If you want to become a credit expert, read on to learn more.
Top 8 Popular Credit Card Myths
Separating credit card myths and truths can help ensure that you have a secure financial future. Once you understand how credit truly works, you can start responsibility building it.
You may be surprised by what you’re about to read. It’s possible that you may learn that something you thought was iron clad credit rule is actually a lie.
Myth 1: Your Credit Score Is Only Determined By Your Payment History
One of the most common credit card myths people believe has to do with the way credit scores are determined. If you have false information about how your score is formed, you may not be doing what you can to keep your score high.
Your payment history does play an important role in determining your credit score, but it isn’t the only thing that matters. A variety of things come into play when your credit score is determined.
Your credit utilization is almost as important when determining a credit score. Credit utilization doesn’t just focus on the amount of use, the amount owed on your credit cards and the card limit also come into play.
The length of your credit history, new credit accounts you’ve opened, and other factors also influence your score.
Take all of these things into consideration when you’re trying to build your credit or get new cards. It’ll ensure that you have a complete picture of what you need to do to improve your score.
Myth 2: Credit Cards Are Great For Making Purchases You Can’t Afford
We’ve all used credit cards to pay for things when we’ve been low on cash, but that isn’t the way they should be used.
Credit cards should be used to build credit and get great perks. They can also be used for when you don’t necessarily have money at the moment but can pay it off in a reasonable amount of time.
Essentially using a credit card does nothing more than extend the length of time it takes to pay for something. Either way, you need to find the money for it, and if you use a credit card you have to pay interest on top of everything.
Viewing credit cards as a form of free money is one of the most financially damaging credit card myths you can believe. Your credit card is a tool to help secure your financial future, every purchase you make should be budgeted and accounted for.
Myth 3: All Credit Card Companies Are The Same
When some people look for cards, they view credit card companies as interchangeable. They all offer lines of credit, so that must mean they’re all the same, right?
Believing credit card myths about all companies being the same can all ensure that you’re not getting the most out of your credit cards.
Every credit card company may offer you lines of credit, but that doesn’t mean that they’re all the same. They can vary in terms of what kinds of cards they offer, the perks associated with the cards, and much more.
Some credit card companies have special relationships with businesses and give their customers discounts for shopping there. Other cards have programs where you can earn frequent flyer miles and other perks.
Be sure to do your research before you go with a certain credit card. You’d be surprised at what each one offers.
Myth 4: Going Over Your Credit Limit/Making Late Payments Doesn’t Matter
Many people assume that going over the limit doesn’t matter much or won’t have long-term consequences to their credit history. After all, credit card companies can just raise your limit. They get more money out of you, so everyone wins right?
The same mindset often pertains to late payments. You can just make the payment, handle the fees, and keep spending normally.
In terms of severity of credit card myths, thinking that there are little to no consequences for making late payments or going over your limit may be the most damaging.
Upping a customer’s credit limit isn’t a simple thing to do, and raising it isn’t a guarantee. A lot of work goes into determining the appropriate amount of credit to give to people. The limit you were at may be as high as you can go.
Banks and lenders can also penalize people that repeatedly do these things. Some may issue overcharge fees or increase the amount of interest you have to pay on cards. In some extreme cases, they may close the account altogether.
These issues also are reported to credit bureaus. Having too many instances of late payments or exceeding your credit limit can lower your score.
Overall, going over your credit limit and making late payments isn’t worth the trouble.
If you feel like you’re getting close to reaching your limit or may miss a payment, contact your credit card company. They may be able to find a solution that won’t hurt your credit history or your wallet.
Myth 5: Making The Minimum Payment Is Fine
The power of minimum monthly payments is one of the most prevalent credit card myths around.
It’s important to pay your credit cards on time, but if you only pay the minimum amount you’ll be paying off your balance for a long time.
The minimum payment amount does little to take away your debt, and usually just covers the amount of interest you’ve acquired.
If you have to make the choice between paying the minimum and not making a payment at all, choose to make the minimum but don’t make a habit out of it. Make a commitment to paying off more than the minimum each month.
With the right help, you can easily gradually save more for credit card payments so you can quickly pay off your card. Take time to re-evaluate your budget to see where you can make changes.
Myth 6: You Can Open A Credit Card In Your Child’s Name To Build Their Credit
When it comes to credit card myths, this bit of misinformation can land you in a lot of trouble.
Some parents want their kids to build credit as soon as possible, so they’ll take out a credit card in their child’s name and use it.
They figure that if they keep up with monthly payments it’ll help build their child’s credit, and they have a backup card in case they need to use for an emergency.
This innocent and well-meaning gesture could get parents in jail for identity theft and/or fraud.
The law is very clear that people under the age of 18 cannot have a credit card. Some companies won’t even let someone have a card that’s 21 or younger without having a co-signer.
You can’t take out a credit card in your child’s name, but you can still help them build credit.
Talk to some your credit card companies and see if you can add your child as an authorized user to the account. If the credit card companies report authorized users to credit bureaus, you can easily build your child’s credit.
They’ll receive a credit card they can use, but the primary account holder (you) will still be responsible for payments.
Myth 7: You Need To Carry A Balance To Build Your Credit
There are a lot of credit card myths related to improving or building credit. Many people believe that you need to carry a balance for a few months, or even years, to truly build a credit score.
Having a high balance could result in paying more in interest. Your goal to improve your credit could be costing you a lot of money in the long run.
You need to utilize your credit card if you want to improve your score, but that doesn’t mean that you need to carry a balance.
Credit card companies also keep a close eye on your card utilization rate. Your card utilization rate is the percentage of how much of a balance you carry in relation to the total limit on your card.
Lenders don’t like see this rate climb too high since it could be an indication that you may not be able to pay off your debt.
There’s nothing wrong with carrying a small balance, but you don’t want to nearly max out your card and make small payments.
Myth 8: Your Score Improves When You Close Cards You Don’t Use
Do you have credit cards you don’t use anymore? Have you paid off the balance on a few of your cards?
Don’t rush to close those accounts.
There are a lot of credit card myths related to the opening and closing of accounts. Some people believe that credit scores improve when you close cards because that shows that you’ve actively paid them off.
Keeping an account open for a card you don’t use can actually be a good thing for your credit. The open account can help lower your utilization rate even if you have high balances on other cards.
If you do feel like you need to close an account, get rid of store specific cards or cards with high maintenance fees.
Bonus Myth: Checking Your Credit Score Lowers It
When it comes to credit card myths, this is a classic.
You don’t want a lot of “hard” inquiries into your credit score. A “hard” inquiry would come through when someone requests your credit report because you’ve requested a new loan, card, or another form of credit.
A lot of different companies and creditors checking your score repeatedly isn’t good. Some credit agencies may take that as a sign that you’re taking on too much credit.
You checking your own credit score is a “soft” inquiry, and that won’t set off any alarm bells for agencies.
How To Fix Mistakes Caused By Credit Card Myths
Did you believe some of the credit card myths we just went over? Are you worried about how to fix your credit now that you know the truth about credit cards?
Don’t worry, we’re here to help.
If you’re seriously concerned about your credit score you should talk to a financial planner or credit expert for help. But in the meantime, there are things you can do on your own right now that can improve your credit score.
Contact Your Creditors
Don’t think of creditors as the enemy, they can help you if you feel like you need assistance.
Credit card companies want to get the money that they’re owed. They’re inclined to help their cardholders if they’re in trouble.
They may be able to help you may a payment plan or lower your monthly payments to make things more manageable.
Commit To Making Payments
Now that you know how harmful making late or missing payments all together can be, you need to make sure you pay your bills on time.
Set aside some time to go through your budget and see where you can cut spending. Right now your goal is to catch up with your monthly payments and start to pay down your balance.
Find A Card The Works For You
You can’t improve your credit if you aren’t actively building it. Your credit may bad, but that doesn’t mean that you can’t get a credit card.
There are a lot of credit cards for people with bad credit. Some credit cards don’t require credit checks. Other credit cards, like secured cards, are designed to help people build their credit.
Now that you know how to separate credit card myths from the facts, it’s time to put that knowledge to good use.
If you want to improve your credit, read our list on how to find the best secured cards available. Also be sure to check out our blog for other interest and educational financial content.
Do you have other financial questions? Check out our customer service page to read our FAQs, or contact us so we help.