Bad Credit Card Advice You Should Forget
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Credit cards can help you in a number of ways. These versatile financial tools can help you build your credit score while earning cash back rewards or rewards. Credit cards also give you protection when you make purchases that other payment methods can’t compete with.
RELATED: How to improve your credit score quickly and for free
But if you mismanage your credit cards, those same accounts can lead to serious financial problems. Read on for eight examples of bad credit card advice that could hurt you. You’ll want to forget about these credit card misconceptions to get the most out of the bits of plastic in your wallet.
1. Having a balance on your credit cards helps your credit scores.
The idea that you have to show some debt on your credit report to get a higher credit score is irrelevant. Instead, credit scoring models like VantageScore and FICO reward you for keeping your credit card usage low.
The term “credit utilization ratio” describes the relationship between your credit card balances and your credit limits. If your credit report shows that you are using half of your credit limit (for example, a $ 1,000 balance on a card with a $ 2,000 limit), your usage rate is 50%.
Lower credit utilization rates are good for your credit score. Having fewer accounts with unpaid balances on your credit report can also improve your credit score. Plus, when you roll over a bad credit card balance month-to-month, you’ll waste money on interest charges.
2. Paying your credit card late on occasion will not hurt your credit score.
Another dangerous misconception about credit cards is the idea that paying your late bill every once in a while won’t hurt you. In fact, even a single 30-day late payment on your credit report puts you at risk of damaging your credit rating.
Payment history represents 35% of your FICO score. So if you want to earn and maintain a great credit score (and the benefits that come with it), making every credit card payment on time is essential.
3. It’s good to only make the minimum payment.
Paying your minimum payment on time each month protects your credit history against damaging late payments. And if you’re in a bind due to a financial emergency, like job loss or illness, it may be okay to pay only the minimum amount owed while you’re working to get back on your feet.
Under normal circumstances, however, you’ll want to pay off your statement balance every month. When you pay only the minimum amount owed, it can lead to credit card debt, high interest charges, and potential damage to your credit score.
4. You must close credit cards that you no longer use.
Having multiple credit cards shouldn’t hurt your credit score, as long as you use your accounts responsibly. But when you close a credit card, you risk hurting your credit score instead of helping it.
The reason that closing a credit card, especially a card with no balance, can damage your credit score is that closing an account could increase your overall credit utilization rate. When your balance-to-limit ratio goes up, there’s a chance your credit score will drop in response.
5. Debit cards are better than credit cards.
Credit cards are my preferred method of payment for most financial transactions. In fact, I haven’t used my debit card in years. But some people argue that debit cards are the safest choice because you can’t use them to get into debt.
That’s a good point. However, credit cards still trump debit cards in three main ways:
If you’re worried about the temptation that a credit card might pose, you can always open an account and then contact the card issuers to request a lower credit limit. A lower credit limit could help control your over-spending urge, if that’s something you need to. And you can make multiple payments per month, as you use the account, to make sure there is still enough credit limit available to use for daily purchases.
6. You must avoid new credit card applications to protect your credit score.
When you apply for a new credit card, the issuer will check your credit report with one of the three major credit bureaus. This credit check is also known as a credit check – a difficult credit check to be precise. The reason it’s called a “hard” survey is because it has the potential to hurt your credit score.
Yet the negative impact that a thorough investigation could have on your credit score is often overestimated. Credit applications are among the least influential factors when it comes to your credit score. FICO states that most people will see their credit score drop by less than five points when a new application is added to their credit report. Sometimes a serious request won’t affect your credit at all.
Smart Tip: Checking your own credit report is called a “soft” credit check, and it doesn’t hurt your credit score.
You need to be careful not to apply for too much new credit in a short period of time. But you don’t have to avoid asking for funding when you need it, or even pass up the opportunity to get a credit card signup bonus offer. The whole point of getting good credit, after all, is to be able to use it to your advantage.
7. Interest rates, fees and other credit card terms are set in stone.
If a credit card issuer approves your request, they will set the terms of your account (i.e. interest rate, fees, etc.) based on your credit status and other factors. . But those initial credit card terms are not set in stone.
After you’ve managed your credit card account well for six months or more, it may be worth calling the card issuer. Consider asking your credit card company if they are willing to do any of the following:
There is no guarantee that the card issuer will honor your request. However, there is also no harm in asking.
8. Credit cards put you in debt.
Credit cards do not automatically lead to debt. In fact, the best way to manage a credit card is to pay off your balance every month. If you follow this rule of thumb, you can achieve better credit scores and save money while enjoying the benefits of the credit card.
Remember, a credit card is just a plastic tool. You have all the power to decide how you are going to use it.
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