Should You Carry a Balance on Your Credit Card? 15 Common Credit Card Myths and Truths
About the Author
Hi, I'm Victoria. I am the Community Marketing Coordinator at Dealspotr.
In This Guide
- Myth: You shouldn’t have a credit card.
- Myth: Keeping a balance on your credit card will help your credit score.
- Myth: As long as you make the minimum monthly payment on your card, you’re fine.
- Myth: Using a credit card online isn’t safe.
- Myth: Credit card interest begins to accrue immediately after you make a transaction.
- Myth: Signing up for a no-fee credit card is always a better deal than signing up for one with annual fees.
- Myth: You need to have one of every major credit card
- Myth: You should only have one credit card.
- Myth: Opening a credit card hurts your credit score.
- Myth: You should get a credit card to buy things you can’t afford.
- Myth: Using a debit card is just as good as using a credit card to make purchases online.
- Myth: You shouldn’t accept a credit limit increase if you don’t need it.
- Myth: Closing out a card that you no longer use will help your credit score.
- Myth: I’ll lose my rewards if I close out a credit card.
- Myth: Maxing out a credit card isn’t that big of a deal.
Credit cards are an important factor in your financial wellbeing and can make the difference between a good or a bad credit score. And, your credit score can make the difference between being able to access a mortgage, get a loan, rent an apartment, and much more.
So, how much do you know about these plastic wonders and how they work? Can you weed through the myths about credit cards or do you have questions about what’s true and false?
Either way, you’re in luck! In this guide, we’re going to dispel 15 common myths about credit cards so you can use them as simply and effectively as possible.
Myth: You shouldn’t have a credit card.
Some people think that not having a credit card keeps away the temptation to spend money that you don’t have. And, in some cases that may be true. After all, according to a 2017 Nerd Wallet survey, the average American household that has credit card debt has a whopping $15,654 worth!
However, having a credit card is an important part of building good credit. What’s more important is that you’re smart about how you use it. If you’re nervous about having a credit card, consider getting one to use just for paying off recurring bills or making small everyday purchases that you would otherwise make with cash or a debit card.
Myth: Keeping a balance on your credit card will help your credit score.
You might have heard that you should keep a balance on your credit card in order to improve your credit score. In reality, what you want to do is wait until your monthly bill comes to pay off your balance and you should pay it off in full or as much as you can at that time.
Most experts recommend keeping your credit utilization ratio, meaning the percentage of your current balance compared with the total credit available to you, below 30 percent.
If you leave a small balance on your card each month, you’re not really hurting or helping your credit score. But, you are going to have to cover that extra interest on your balance each month if you don’t pay it off in full and that’s not fun for your wallet.
Myth: As long as you make the minimum monthly payment on your card, you’re fine.
It’s tempting to just pay off the minimum amount of your balance each month because, duh, then you have more money in your pocket. But, paying the minimum means that your balance will continue to grow and you’ll tack extra interest on top of it as well.
If you’re having a tight month then paying the minimum is fine. However, you should be aiming to pay your balance off in full each month or to pay as much as you can to avoid building up debt and to keep your credit score in good shape.
Myth: Using a credit card online isn’t safe.
Remember when we all thought having a MySpace profile wasn’t safe too? Well, look at us now!
Shopping online with a credit card does come with certain risks. But, as long as you follow a few simple precautions, you shouldn’t have any issues making purchases online. Here are some of our recommendations:
Only shop with businesses you trust.
Avoid making purchases on public wireless networks where your information is less secure.
Make strong passwords for any website that has your credit card information stored.
Only make purchases on websites you know are secure. They’ll have an ‘s’ after the http in the website’s address.
Use credit instead of debit when possible. Credit cards tend to have better security standards and you’ll typically be responsible for a much smaller amount of fraudulent charges with a credit card than with a debit card.
Myth: Credit card interest begins to accrue immediately after you make a transaction.
In reality, interest only begins to accrue the day after your monthly payment is due. This means that if you pay off your credit card balance each month, you won’t wind up tacking pricey interest costs on top of your regular spending. Plus, you’ll keep your credit score in great shape!
Myth: Signing up for a no-fee credit card is always a better deal than signing up for one with annual fees.
Humans are nothing if not suckers for instant gratification. Given the choice between a $0 annual fee versus a $75 one, many of us would choose the one where we don’t have to drop any cash right away.
But, actually, you’ll need to do a little bit of calculating to figure out which is the better deal. For instance, a card may have an annual fee, but a much lower interest rate than a no-fee card. Or, the cash back deals or other rewards you get from a card may make paying an annual fee more worthwhile in the long run.
Poke around a bit when you’re choosing a card and see which one makes the most sense for you.
Myth: You need to have one of every major credit card
No, there is no reason to have a Visa, Mastercard, Discover, and American Express. It used to be the case that retailers were a little more selective with which credit card companies they accepted.
But nowadays, most online retailers will accept all of the major cards. If you want to play it safe, Visa and Mastercard are more universally accepted than Discover and American Express.
Myth: You should only have one credit card.
Again, it might seem like the more credit cards you have available to you, the more temptation there is to spend money. However, having several credit cards actually has its advantages:
You can get access to different types of rewards such as air miles and cash back on everyday purchases.
You can increase your total credit limit which will help your credit utilization ratio.
You have a backup in case one card is lost or stolen.
You can keep one card just for shopping online so you have a backup in the event of identity theft.
You can transfer your balance between cards depending on which has a lower interest rate.
Of course, it’s not wise to have tons of credit cards to your name. But, having more than one can be advantageous.
Myth: Opening a credit card hurts your credit score.
Yes, it’s true that you may experience a small drop in your credit score when you open a new card. This is because when you apply for a card, the issuer will check your credit score and the record of that, known as a hard inquiry, will show up on your credit report.
Because opening a new card means opening up the possibility of new debt, this may cause your credit score to drop slightly. But, that drop is only temporary and as long as you make your payments on time and in full you should be able to bring it back up in no time.
Myth: You should get a credit card to buy things you can’t afford.
We know that stereo system you’ve been eyeing on Amazon is tempting. And, we know that plugging in those 16 digits and hitting “buy” seems like a good idea.
But, credit cards are meant to be used to purchase the things you can afford, to reap rewards for the purchases you make, and to build yourself a good credit score. If you’re going into it thinking a credit card will help you buy things way out of your budget range, you might want to reconsider.
Myth: Using a debit card is just as good as using a credit card to make purchases online.
The good thing about using a debit card is that you can’t spend money you don’t have. Well, you can, but it’s going to cost you pretty heavily. There are some serious advantages to using a credit card instead including getting access to rewards such as cash back on groceries and other expenses and being able to access car rentals and hotel payments in places that don’t accept debit cards.
Most importantly, a debit card has no effect on your credit score where making the same purchases on a credit card and paying them off regularly will do wonders for that 3-digit number.
And, in fact, debit cards can be much less secure from identity theft than credit cards. Plus, in the event that someone does steal your identity, debit card issuers will often require that you pay much more of the fraudulent charges than credit card companies will.
Myth: You shouldn’t accept a credit limit increase if you don’t need it.
Some credit card companies will offer to increase the amount of credit available to you, especially if you’ve been a good customer and made timely payments. Of course, their hope is that it will lure you into spending more money. However, if you keep your spending around the same, accepting an increase in your credit limit can actually improve your credit score.
Why? Because it will improve your credit utilization ratio meaning that the ratio between the balance you have compared with the amount of credit you’re allowed will decrease. And that’s good for your credit score.
Myth: Closing out a card that you no longer use will help your credit score.
Again, the issue of your credit utilization ratio is important to consider. Closing out a card means that you have less total credit available to you which means that your total balance is going to be a much larger percentage of your total credit limit.
In addition, older credit cards factor into your credit score more favorably than newer ones and boost your credit history. Keeping an old card means allowing that credit history to continue to positively impact your credit score.
So, unless you’re being charged an exorbitant annual fee for a card you’re not using, you might want to think about keeping it around.
Myth: I’ll lose my rewards if I close out a credit card.
This one isn’t completely false, but in many cases you will still be able to access rewards even if you close out an account. For example, if you have a credit card with United Airlines and you’re earning miles for each purchase, United is actually managing your miles through their loyalty program.
So once the miles are logged in your rewards account with United, they’re yours to keep. Of course, if you’re getting cash back rewards from another credit card, you’re not going to continue to get that reward once you close the account.
Myth: Maxing out a credit card isn’t that big of a deal.
Most credit card companies will allow you to make a few purchases beyond your credit limit which might make it seem like it’s not that big of a deal to do so. But, there are big consequences to maxing out a credit card:
Your credit score will drop.
You card issuer may close your account.
Your card issuer may slam you with a penalty APR that will add even more debt each time you use the card.
When your balance is high and you’re not paying it off, you’ll be accumulating a bunch of extra interest on top of the spending you’ve made on the card.
There you have it, folks! Some of the most common myths about credit cards debunked and dispelled. Be sure to keep up with Dealspotr to find discounts and savings that will help you keep your balance low and your credit score high!