You don’t have to look far to find bad advice on the subject of credit cards. Whether that advice comes from a well-meaning friend or a misinformed professional, believing the wrong information could cost you money and damage your credit scores. Learn how to raise your credit score by responsibly using credit cards.
As a credit expert, I’ve seen it all when it comes to credit card myths. Below is a breakdown of five of the most common credit card myths I’ve come across time and again. Considering these myths will give you my insider knowledge on how to both build credit and raise your credit score.
Myth 1: Credit Cards Make You Go Into Debt
Credit cards have a reputation for causing people to go into debt. Yet the idea that opening credit cards is a bad financial choice isn’t fair or accurate. You get to decide how you will use your credit cards, just as you get to decide how you’ll use the money in your bank account.
Opening a credit card doesn’t automatically lead to debt. According to the Federal Reserve’s most recent Survey of Consumer Finances, around 56% of families in the U.S. don’t carry any outstanding balances on their credit cards.
If you feel confident that you can manage your credit cards responsibly (paying on time and in full every month), your accounts can be an asset instead of a burden. A well-managed credit card may help you to establish better credit scores over time and can help you take advantage of some amazing rewards.
Myth 2: Carrying a Credit Card Balance Will Boost Your Credit Scores
The idea that revolving an outstanding balance from one month to the next will somehow help your credit scores is false. This bad advice could lower your credit scores and cost you a lot of money in interest fees.
In reality, credit scoring models like FICO and VantageScore reward you when the balance-to-limit ratio (called credit utilization) on your credit cards remains low. Smaller credit card balances can lead to lower credit utilization and often higher credit scores. Paying your balances off in full each month is the ideal way to manage your accounts.
FICO Scores also consider the number of accounts on your credit report with outstanding balances. Fewer is better. By paying off your credit card balances before your statement closing date, you can make sure a $0 balance is reported to the credit bureaus for the coming month.
Myth 3: Having too Many Credit Cards Is Bad for Your Credit Scores
There’s no such thing as the perfect number of credit cards. You can earn good credit scores with one credit card or with 20. The number of credit cards on your credit report isn’t as important as how you manage your accounts. Personally, I have a dozen credit cards and keep my credit score in the 800s.
However, it is possible to open too many new accounts in a short period of time. Both FICO and VantageScore credit scores consider the number of “hard inquiries” on your credit report. Hard inquiries take place when you apply for new credit (among other times). If you have too many hard inquiries on your credit report in the last 12 months, your scores might decline slightly.
It’s fine to apply for new credit when you want to take advantage of a good credit card deal. But it’s typically best to space your credit card applications out instead of applying for a ton of new accounts at once.
Myth 4: You Should Close Unused Credit Cards
You might think it’s wise to close credit cards you don’t use anymore. Yet unless there’s a valid reason to close an account, like getting rid of joint cards during a divorce or closing an annual fee card that no longer benefits you, it’s usually best to leave your credit cards open.
Closing a credit card might backfire and hurt your credit scores. You won’t automatically “lose credit” for the age of the account, as some people believe. (That’s another credit card myth.) But closing a credit card might increase the overall credit utilization rate on your credit report. Remember, when credit utilization increases, your scores could go down as a result.
Myth 5: Annual Fees Are a Waste of Money
Here’s a credit card myth I fell for myself. Once upon a time, I wasn’t a fan of annual fee credit cards. I had excellent credit and felt like there was no reason to “settle” for cards with annual fees. Boy, was I wrong.
I’ve since come to realize that the right credit card can give you far more value than the cost of its annual fee. Take The Platinum Card® from American Express and the Chase Sapphire Reserve®, for instance. Both of these cards have high annual fees of $550 each per year.
However, together with my Chase Ink Business Preferred℠ Credit Card, these cards helped me earn more than 300,000 Amex and Chase Ultimate Reward Points in six short months. When you stack on the additional card benefits I was able to enjoy (e.g., travel credits, airport lounge access, Uber credits, etc.), I’ve received far more value from them than the cost of my annual fees.
If you’ve worked hard to earn a good credit rating, you deserve to enjoy the fruits of your labor. Opening lucrative rewards cards is just one way to make your good credit work to your advantage.
Remember to pay your full credit card balance by the due date each month. You might even set up an automatic draft as a backup in case you forget. When you use your credit cards responsibly, they can benefit you for years to come.