4 Credit Card Myths and Facts
4 Credit Card Myths You Need to Stop Believing
Millennials carry the second-highest rate of credit card debt, just behind Gen X-ers. There is so much unhelpful (and often untrue) personal finance advice being passed around. Nowhere is this more evident than when it comes to the myths that surround credit cards.
This post will help you unpack these credit card myths so you can make empowered and informed financial decisions. By knowing the credit card myths and facts, you’ll be better equipped to handle your credit with confidence.
Let’s dive into the four most common myths I hear about credit cards, whether in my private practice or when I’m facilitating financial wellness workshops. We’ll explore what’s true, and what’s not, and help you feel more confident when it comes to your credit.
Credit Scores and What They Mean
Before we jump into busting credit card myths, let’s do a quick refresher on credit scores since a lot of myths stem from misunderstandings of how they work.
A credit score is a number that reflects how likely you are to repay a loan. Ranging from 300 to 850, these scores are divided into five categories: poor, fair, good, very good, and excellent. Banks and other lenders use this score to decide whether to lend you money and determine the interest rate you'll receive. A higher score improves your chances of qualifying for lower interest rates, larger lines of credit, and better rewards credit cards. Additionally, a strong credit score can make you a more attractive candidate for apartment rentals and other financial opportunities.
What impacts credit score are five different factors. Each of these factors are important, but note that they aren’t all equally weighted the same. The five factors that impact your credit score are:
Payment History (35%): This is the most significant factor. If you pay your bills on time, your score will go up. Late payments? Your score takes a hit.
Credit Utilization (30%): This refers to how much of your available credit you’re using. Keep it below 30% usage. To put this into context, for a $1,000 credit limit, avoid carrying a balance over $300.
Length of Credit History (15%): Lenders want to see how long you’ve been using credit, whether that’s a credit card you opened in college or a car loan.
Credit Mix (10%): This refers to the types of credit you manage—like credit cards, auto loans, and mortgages.
New Credit (10%): Opening a lot of new accounts in a short period can lower your score, as lenders might see this as a sign of financial instability.
Now that we’re clear on how credit scores work, let’s dive into busting those myths!
Myth #1: “Carrying a Balance Helps Your Credit Score”
This is one of the most common credit card myths I hear. Many people believe that you should always carry a small balance on your credit card to improve your credit score.
Let me be clear: carrying a balance does not help your credit score. In fact, carrying a balance, especially over 30% of your total credit limit, can hurt it. The credit score utilization rate is the percentage of your available credit that you’re using, and banks want to see you using 30% or less. For example, if your credit limit is $1,000, you shouldn’t carry more than $300 as a balance.
The credit card minimum payment vs full payment are two different things. The credit card minimum payment is the minimum amount you must pay to keep the account current and in good standing. The full payment amount is the amount you owe on your credit card, and is generally larger than a minimum payment.
Paying your balance in full and on time is crucial. The myth that you need to carry a balance probably stems from a misunderstanding of the first two factors that impact your credit score: payment history and credit utilization. People think that by carrying a balance, they’re improving their utilization, but that’s not true. In reality, you want to pay the entire balance off each month. If you aren’t able to pay off the full balance, you should at least aim for paying off as much as you can to keep your credit utilization below 30%.
Not only does carrying a balance hurt your credit score, but it also costs you financially. When you only pay the minimum balance, the rest of your balance accrues interest. By paying your balance in full each month, you avoid high-interest payments and improve your score. It’s a win-win!
Myth #2: “You Should Close a Credit Card as Soon as It’s Paid Off”
I get it—you’ve paid off a credit card and feel an overwhelming sense of accomplishment, so your first instinct might be to close it. But does it help your credit to close credit cards? No, it doesn’t! Closing a credit card can actually hurt your credit score.
Closing a card affects two of the factors that make up your score: the length of credit history and the credit utilization rate. If you have two credit cards with a total credit limit of $1,000 and you’re consistently using $300 a month, you’re at the optimal 30% utilization. But if you close one of those cards, reducing your available credit to $500, your usage suddenly jumps to 60%, which can significantly lower your score.
If you’re tempted to close a card because you’re worried about overspending on your credit card, I suggest hiding it away instead. Put it in a safe or a drawer where you won’t be tempted to use it and remove it from your saved payment methods, but keep the account open.
If you’re trying to avoid an annual fee, another option is to ask your credit card issuer for a product transfer. Call (or chat) with your credit card issuer and ask to do a product transfer to a no-annual fee credit card instead. This preserves your line of credit and credit history while saving you money on an annual fee.
Myth #3: “Travel Credit Cards Are Only for Frequent Flyers”
Another common myth is that travel credit cards or rewards credit cards only benefit people who travel internationally or fly often. Not true!
If you can manage your credit cards responsibly—paying them off in full each month without overspending—then rewards cards can be a great way to earn rewards, even if you don’t fly a lot. For example, if you’re loyal to a particular hotel chain, you might be able to score perks like free nights, early check-in, or room upgrades with a co-branded card.
But even if travel cards aren’t your thing, there are tons of other rewards cards out there that might align better with your spending habits. Whether it’s cashback on groceries or gas, the key is to find a card that fits your lifestyle without encouraging unnecessary spending.
Myth #4: “Checking Your Credit Score Lowers It”
I can’t tell you how many people avoid checking their credit score because they think it will lower their score. This myth was more relevant decades ago when checking your credit meant pulling a full credit report, but it’s outdated now.
Today, there are plenty of ways to check your credit score for free without negatively impacting it. These are called “soft inquiries,” and they don’t hurt your credit score. Many banks and credit cards offer free credit score monitoring as a perk, so you can regularly check your score and ensure it’s where it should be. Other options include using a credit score monitoring service, such as Credit Karma or Credit Sesame (not affiliated with either of these, just sharing!).
Keeping an eye on your credit score is important because it helps you catch any suspicious activity, like identity theft or fraudulent accounts. By monitoring your credit, you’re not just keeping tabs on your score—you’re also protecting your financial health.
Key Credit Card Facts
To summarize the truth about credit cards, including things that help your credit score, here are the four facts covered:
Fact #1: Pay your credit card statement off in full each month to save money and improve your credit score. Banks reward you with a higher credit score when you pay your balance in full and on time, so make sure you’re not carrying a balance.
Fact #2: Don’t close your old credit cards. It won’t help your score; instead, consider requesting a product change to keep your line of credit open.
Fact #3: There are other rewards and benefits from credit cards outside of traveling perks. You don’t have to be a jet setter to benefit from rewards cards. There are options out there for everyone.
Fact #4: Checking your credit score with a monitoring service is beneficial. Checking your credit score regularly won’t hurt your score and is crucial for monitoring your financial well-being.
If you’re struggling with managing your credit cards or want to learn more about your financial habits, take my free financial archetype quiz here!
Knowing your unique strengths and challenges can make all the difference when it comes to staying on top of your financial health.