There are a lot of myths that circulate around credit cards and credit scores which have caused confusion among some people. In this blog post, we will cover 5 of the more common myths we hear revolving around credit cards and credit scores and our insights regarding them.
1. You need to carry a credit card balance to build credit
Actually, you do not need to carry a balance to build credit. Should you leave a balance, you are just paying unnecessary interest on left over balances every month. With an average credit card APR of 18.24% as of Q3 2021 according to Wallet Hub, that is some serious interest to pay if you leave a hefty balance on your credit cards. It is important to pay your bills on time and in full each month. This shows the card issuer and credit bureau that you are financially responsible.
2. The more you spend, the more your credit score goes up
On the contrary, your credit score is not directly linked to how much you spend. It is really about spending responsibly and making payments on time. One factor that does involve how much you spend is your credit utilization. Your total amount of spending compared to how much credit is available under your name is factored into your credit score. For more info, check out Alex’s blog post about 5 Factors That Influence Your Credit Score.
3. Checking your credit score lowers it
Monitoring your credit score helps you track progress when building and maintaining credit, but it is important to check it the right way. Checking your own credit report is known as a soft inquiry. Soft inquiries do not affect your credit score, no matter how many times you check, even if you use a credit monitoring service. We recommend to at least check your score once per year. You are entitled to a free annual credit report from each of the 3 credit reporting agencies, Equifax, Experian, and TransUnion.
4. You should cancel credit cards you’re not using
Although it is good to cancel products and services that you’re not using, this doesn’t always apply to credit cards. When you cancel a credit card, you lose its line of credit, which means you will have less available credit to your name. If you currently carry a credit card balance, cancelling a card can actually cause your credit utilization to go up. Credit utilization accounts for 30% of your credit score. The lower the credit utilization, the more it helps your score.
5. Using debit cards helps build a good credit score
Unfortunately debit cards have no correlations to credit scores. Since debit cards are not a form of credit (money loaned from the card issuer), transactions will not end up on any credit reports. Remember, debit cards draw money from your own bank account and credit cards draw money from the issuer’s bank account, then you pay back the issuer when the time comes.
We hope this blog post has cleared up some of the more common misconceptions and myths on credit cards and credit scores. If you have any questions about your current situation, schedule a meeting with Tori or Alex!