We’ve all probably heard of much false information about credit cards do’s and don’ts. Tricks to improve your credit scores so you can go for that big purchase sooner. But not all of the myths are true. Be careful as some of them can cause you more trouble and money than do you good.
Here are some common misconceptions about credit card usage.
Should you Leave some balance on your credit card?
It is a common myth that you shouldn’t pay the entire balance on your credit card, instead leave a small amount like $10 on your credit card and pay some interest on it.
This could quite possibly be a myth started by creditors in the 1900s to make money in interest.
This is far from the truth, leaving any sort of unpaid balance on your credit card will hurt your credit score because this would mean you are not good with handling debt. In addition, this will cost you a lot of money over time in interest paid on that unpaid sum and this will lower your chances of getting lower interest rates.
Is having too much Credit availability bad?
Having too much credit available would make it difficult to get bigger loans for stuff like house and car. This is an interesting one which makes a lot sense from a creditor’s perspective.
This started during 1970s and 1980s, mortgage lenders considered borrowers with multiple lines of credit a higher risk. The thought was that more money would get them tempted to spend it all. Therefore, they would fall much deeper in debt and would have a higher chance of getting defaulted. In order to get their money back, they would have to seek legal action which is a lengthy process.
This was an issue in the past but since the system has changed entirely this is no longer an issue. Now, if a person is not able to repay their debt, they usually have a really difficult time navigating through systems without a credit history.
Having a lower utilization rate and consistently paying off debt is a really good way to improve your credit.
Related read: Should you go for a Cashback or Rewards Credit Card?
Should you Cancel unused credit cards?
We often get rid of things we don’t use anymore, in this case, a credit card. It makes sense to close out a credit card in case you misplace it or accidentally uses it and forgets to pay.
Well, this would come in as a surprise but this is would impact your credit score. This again comes down to credit utilization rate, the amount of credit available and the amount being used. Your FICO credit score categorizes this under the amount owed which represents 30% of the credit score. By increasing your credit limit, you would have more available credit therefore the debt would be less in percentage.
For example, if you use $700 from your credit card with a $3,000 limit, you are using about 23% from your available credit. While, if you use $700 from your credit card but the total limit available to you is $7,000 with multiple credit cards, you would be using 10% of your available credit. This would reduce your utilization rate significantly.
Does opening new credit card impact your credit?
Opening the new credit card does have an impact on your credit score. This is because it indicates that you intent on using that credit to perhaps make a bigger purchase. Every time you get a new credit card, it goes through what is called a hard inquiry, by the lender, which drops your credit score by 3-5 points. Credit lenders find it as a higher risk because you could be looking to max out your credit cards if you are actively seeking a new credit card.
This is a temporary drop in credit score which usually stays around for about 6 months, then goes back to normal. However, keep in mind to not open a new credit card if you plan on making bigger purchases like a car or a house within the 6 months.
It is important to note that opening a new line of credit would improve your credit score more than it would lower. As mentioned in the previous point, if you have more credit available and use less of it, this would mean you have a lower utilization rate.
Related read: How to use credit cards to travel for free
Should you rotate your credit cards and use older ones?
Here is the thing, credit card companies are in to make money. If you have a credit card that is not being used in a long time, chances are that your credit card provider would not renew it for you. Credit card companies have a limit to the number of people they can provide a credit to. If you are not using that balance they are more likely to give it to someone that would actually utilize it.
Therefore, if you have an old credit card that used to be your main card, you should use it once a year just so you can maintain that credit card history.