Wondering if you ever followed credit card myths? These credit card myths are guaranteed to teach you a thing or two about your credit.
Credit card myths are extremely popular and are used every day.
I personally tell people to look at their credit cards as their employees. Funny, I know, but it’s the one way I got myself out of paying credit card interest.
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Since I always talk about financial literacy, I noticed that A LOT of people aren’t well versed in credit cards. They are unaware of how to use them correctly, what the general rules are, and any risks involved. I too was a part of “A lot” of people at one point. This is most likely because it isn’t taught in schools. School systems favor teaching young adults how to find x when y=10.
Ugh! Cue the horrible memories of me learning College Calculus in the 10th grade.
Let’s get straight into the credit card myths:
#1 “Always carry a balance” (WORST CREDIT CARD MYTH!)
Always carry a balance, it’ll help your credit score. Oh my goodness. I have been told this credit card myth personally and I actually followed it. I always left a balance on each credit card and paid interest EVERY MONTH.
This has to be the worst credit card advice, EVER.
I wouldn’t doubt that the credit card companies started this horrible myth. No, keeping a balance will not help your credit score. Credit cards help improve your credit score, but there is a better way than just leaving balances on your cards. The best way to raise your credit score is to carry a 10% balance, or less, on the day that your credit usage gets reported to the bureaus.
Next, pay the total amount due from the previous statement on the payment due date. If it sounds confusing let me explain in further detail.
Example:
You have a credit card with a $10,000 limit. On the first of the month, you receive your credit card statement stating you owe $800 from charges made the previous cycle and it’s due on the 20th of the month. According to your statement, your statement closes on the same day. You pay off the balance minus 10% 1 week before the due date and pay off the other 10% on the due date (considering you aren’t using your card during this period).
Doing this will show the credit bureaus that you have 10% or less of credit card utilization which in turn will help your credit card score, ALL WHILE not paying a penny in interest.
During the same month, you charged $320 toward your credit card from the 21st to the 30th, in which you will receive a statement for the following month on the 1st and will have to be repaid on the 30th and you will do this process every month thereafter. It’s important to not use more than 30% at any given time (not more than 10% if you’re a credit card ninja like me) doing so can create a negative effect on your credit score. Credit card utilization accounts for 30% of your credit score! Along with paying credit cards on time, your credit card utilization should be the two things you worry about the most.
#2 “Cancel all unused credit cards”
The only thing that would make me think about closing one of my credit cards is if 1. I cannot control my spending and having a credit card is making it worse. (Cutting it into pieces can help that) or 2. I cannot afford any yearly fees that the card may have. If you are thinking about canceling a credit card, it’s important to pay attention to some important factors.
Is the credit card an older account? This can create a negative effect on your credit score. The average length of all your accounts holds 15% of your FICO score.
Length of credit history is the 3rd most important factor. Payment history is number one and debt utilization (what we spoke about in myth #1) is the second. For example: if your oldest card is 5 years old, your newest card is 1, and you also have a card for 3 years, then the average length of your credit would be 3 years. If you cancel any of the 3 cards, the length of your credit history will change.
There isn’t a way to know exactly how this will change your credit score in relation to points however, it shouldn’t drop drastically.
#3 “Credit card annual fees are never worth paying”
I personally have a Chase Sapphire Preferred Credit Card. Upon signing up, it had a bonus of 60,000 points when you spend $4,000 in the first 3 months. It waived our first yearly fee of $95, offered 2x points on travel, eating out, and grocery trips. It also provides 1x points on everything else.
For me, this is 100% worth the yearly price of $95.
It would NOT be worth it if I were to pay monthly interest on any purchase. My husband and I both co-parent and this includes traveling to another state and city. We definitely would use this card several times a year, creating way more than $95 a year in points. Our first year using this card we were able to generate $1,200 in rewards just using this card for necessities.
Everyone’s situation is different and you should always look into the details of any card that has a yearly fee. Always make sure it makes sense for you and your family.
#4 “Only make the minimum payment”
This will never pay off the balance in a short amount of time. EVER!
In my experience, in some situations, I had no choice but to pay the minimum balance. The only time I would feel comfortable paying the minimum payment today would be if I’m using a 0% introductory APR period.
If you have a total of $5,000 in credit card debt, with 15% interest per year, and you only pay $100 per month, the remaining $2,400 is going to grow at that interest rate. You will pay over $3,000 by the time that balance is paid off, which means that you will have paid more than $500 in interest.
However, if you can bring that monthly payment up to $200, the total interest becomes just under $250. It’s much cheaper to make additional payments in order to minimize interest.
When there are larger balances, the amount of interest will always be more.
You should really look at the minimum payment as truly a bare minimum rather than a recommended amount. Yes, If you can only make the minimum payment in some months, it’s understandable, I have been there SO MANY TIMES! but you should really try to divert some extra money to those balances when extra cash is available.
#5 “Use credit cards for emergencies”
This is literally nails on a chalkboard to me. This was my mindset when I started creating a credit history. The thought of having a credit card in my wallet for last-minute dinner dates with my friends always made me feel a tad bit better. Jeez, thank God for growth lol. Credit cards should never be used for emergencies. Ever!
An emergency fund should be your strategy for emergencies. I too at one point in my life needed credit cards to survive in my early 20’s. Being a single mom at 21 was really hard and I DO NOT regret using credit cards to get by. Now that I know better, I can now teach women, especially single mothers the right way to pay for an emergency. An emergency fund can take time to create but nothing beats being able to afford a $500 emergency with CASH.
Like I said at the beginning of this post, the best way to treat your credit is like an employee. Make it work for you and allow it to help create wealth.
Pro tip:
When using a credit card for unnecessary items, remember that you will always be paying for past behaviors instead of saving for future wealth.
#6 “Only have 1 credit card”
There isn’t a secret number of credit cards everyone should have. Your score does look at the total number of accounts you have along with the kind of accounts you hold. This along with hard inquiries has a low impact on your score, equaling only 10% of your total score. At the current moment, I have 21 total accounts.
Per Credit Karma, this is a “solid number of accounts on my report”. They also notate that having more than 10 accounts is generally a good thing and gives you a better score. Having a variety of accounts is a great rule of thumb however, keep in mind these take time to create and build. Don’t apply for 11 different accounts in one day, easy does it.
There you have it, all 6 credit card myths that I personally dislike. Have you ever swore by any of these credit card myths ? Let me know!
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