When utilized appropriately, credit cards can serve as an advantageous tool for fortifying your financial standing. Regrettably, a significant volume of misinformation circulates regarding the proper management of credit. Listed below are several prevailing credit card myths that warrant clarification.
Myth: Carrying a balance is vital for building credit
A widespread misconception suggests that maintaining a balance is the most effective method to enhance your credit score. It purports that showcasing the ability to responsibly carry debt and repay it over time impresses credit bureaus. However, this belief is erroneous.
In reality, you can elevate your credit score without accumulating credit card debt. This can be achieved by using your credit card for everyday expenses and settling the entire balance every month. Furthermore, paying off your card monthly helps evade unnecessary interest charges.
Myth: Staying below the credit limit ensures a fine credit score
Remaining under your credit limit spares you from incurring penalty-level interest rates. However, carrying high balances influences your score. This is due to credit utilization, representing the percentage of your total available credit currently in use, which contributes 30 percent to your overall credit score.
As a guideline, it’s advisable to utilize less than 30 percent of your total available credit. If your current utilization rate exceeds this threshold, focus on making regular payments and reducing as much of your balances as possible to witness an improvement in your score.
Myth: Overspending for credit card rewards is worthwhile
Numerous credit card issuers offer incentives such as frequent flyer miles or deposit and reward programs as an enticement for card usage. However, if increased spending leads to carrying a balance, the purchases made with the card may not justify the rewards offered. Often, the accumulated interest from carrying a balance surpasses the actual value of the rewards themselves.
Myth: Rejection for a credit card will devastate your score
While being denied a credit card is disheartening, Experian indicates that a denial won’t impact your score any more than approval would. What can affect your score is the number of hard inquiries present on your credit report. Each card application generates a hard inquiry, so it’s prudent to avoid applying for multiple cards simultaneously, even if one application leads to a denial.
Thankfully, there are strategies to minimize the need for numerous applications. Check your credit score before applying and target cards suited for borrowers within your credit range. Opt for credit cards offering pre-approval to ensure your eligibility before submitting an application.
Myth: Credit card interest charges are unavoidable
Although credit card interest accrues rapidly, if you’re overwhelmed by increasing interest charges, there are measures to manage them, particularly when dealing with debt across multiple cards.
With a good credit score, you can consolidate debt into a single payment using a balance transfer card. Alternatively, if your score is lower, consider consolidating debt with a personal loan for a more feasible approach.