Whether you’re an active credit cardholder at 1st Financial Bank USA or moving towards new financial milestones, identifying (and debunking) common credit card myths is a vital first step in achieving blemish-free credit. Through the unfortunate game of personal-finance telephone, we’ve all heard and believed incorrect statements about credit cards at one time or another. While falling prey to this hearsay may appear seemingly harmless, doing so can end up costing you money and seriously impacting your credit score.
That said, viewing credit building through bias-free lenses is an essential step in building your credit score. If you’ve found yourself neck-deep in damaging credit card myths, paddle your way out with this insider information at your disposal.
Top five credit card myths that can lead you astray
Myth 1: Applying for a new credit card will lower your credit score
When you apply for a credit card, the lending institution you are applying to will request your credit history, better known as a “pull.” One pull every now will have a minor effect on your credit score. In most cases, the impact is negligible. Although, outsiders will view a history of back-to-back “pulls” as a sign of financial insecurities. With this in mind, these pulls will negatively affect your credit score eventually.
Having fewer pulls on your credit history and making your monthly payments on time is a great way to ensure your credit score is as high as possible.
Myth 2: Paying your balance in full makes it appear that you’re debt-free
The smartest way to use a credit card is to pay your balance in full each month to avoid interest and avoidable late charges. Most credit cards offer an interest-free time frame of one year to 16 months to pay for the expenses you rack up. From there, the balance of the charges is divided up into monthly payments. As you make the monthly payments, the debt amount will decrease until you’ve eventually paid it all off and reach debt-free status.
Throughout this period you’re paying your credit card balance off, banking institutions will consider you to be in debt, affecting your credit score. Even though accruing debt can send a shiver down any debtor’s spine, banking institutions don’t mind debt, as long as the individual in question meets one condition. Banking institutions don’t look down on clients in debt so long as the balance due is a small percentage of your available credit, and the debtor in question makes consistent payments.
Myth 3: Cancelling your credit cards will positively affect your credit
After you have paid off a credit card balance, it’s crucial that you keep the line of credit open and don’t close your account. Unfortunately, closing your account lowers your credit score, as it increases your credit utilization ratio.
Additionally, when you cancel a credit card, it lowers the total amount of credit lent. If you have any other lines of credit open, the amounts owed become a larger percentage of your available credit. With these consequences in mind, it’s in your best interest to keep your line of credit open and slice your credit card in half or stow it away once you’ve successfully paid it off.
Myth 4: If you miss a payment, your credit score goes down
Whether you forgot to pay a bill or your paycheck is still in transit, missing a credit card payment can send you into a panic. Luckily, your credit score will not be significantly affected by a missed payment so long as you pay the balance soon after. Your credit card company will generally charge you a late fee, but your credit score will not be affected if you make the payment in less than 30 days.
Myth 5: Credit card terms are non-negotiable
Consumers assume that their credit card terms are non-negotiable, but sometimes an ask-and-you-shall-receive mindset will serve you in the long-run. Banks want to keep your business, so they’re often willing to make minor concessions to keep your line of credit open. Whether your interest rate is too high or you’re not sure that you want a card with an annual fee, ask your bank if they are willing to lower the rate or waive the fee for a year.
Despite the rampant stigmatization of credit cards, there’s no shame in swiping your charge card from time to time. Remember, a pragmatic approach will help you safeguard your family from financially debilitating credit card debt.