Over the course of your life it is likely that you’ve received incorrect advice when it comes to both your credit score and credit cards in general. As much as Pursuing Point is about the pursuit of credit card points and miles for use on travel and other redemptions; its also about improving financial literacy so that our readers may make more informed credit decisions. The goal of this post in particular is to look at some of the most widely held beliefs, and expose them as the myths that they are.
- You should never cancel a credit card – As with most things in life, the situation you’re in should dictate whether or not you should cancel a credit card. If the card is older, paid off, and carries no annual fee then you should work towards keeping that account open, rather than considering closing it. If however the card is newer, carries an annual fee, and you don’t feel like the benefits outweigh the costs then you may want to consider canceling it. Doing so may affect your credit score in the short term, and you’ll want to consider the potential ramifications before going through with it. But doing so is not always bad, and you should not fear the cancellation process once you’ve weighed all of the appropriate pros and cons. For an in-depth look at the questions you should ask yourself before you make that decision be sure to read this article which outlines when you should/should not cancel a card, and the potential effects doing so will have on your credit score.
- Having too many credit cards is bad – Your credit score is made up of a number of different factors, and for a full breakdown be sure to check out how your credit score is calculated. One of the factors is credit utilization which is simply the amount of money you owe divided by the summation of all of your lines of credit. So if you owe $1,000 and have $10,000 in available credit across all cards then your utilization is at 10%. If you then signed up for another card that had a $10,000 limit and there was no change to your outstanding debts your utilization would drop from 10% to 5% and you may actually increase your score. This is not to say that you should sign up for cards willy nilly, it simply means that signing up for new cards is not something to be feared so long as you’re responsible with the lines of credit that have been given to you.
- Opening new lines of credit will hurt your score over time – Generally speaking, when you sign up for a new credit card your score may drop a few points. This happens because the lender is checking your credit report in order to make a lending decision. This is known as a hard inquiry. Each hard inquiry can stay on your credit report for up to 2 years, but generally over time its effects diminish and in most cases your score will return to normal after a few billing cycles.
- You must carry a balance to improve your score – This is easily the most frightening of all the myths that we’re talking about, because it could end up being the most detrimental as well. The best balance to carry on a credit card is no balance at all. You’ll do more for your credit score by having credit available to you but not using it, or using small portions of it (ideally you want to stay below 10% utilization) than you will by carrying balances over time. Whats more, if you’re carrying a balance and paying interest you’re almost definitely negating all of the potential benefits that would be gained by having a rewards card. My personal preference is to track my finances daily, and pay off cards as soon as possible, sometimes the same day as when charges are made. This allows me to maintain a low credit utilization rate, and ensure that I never pay any interest.
- Checking your credit score will lower it – As mentioned in #3, having a hard inquiry placed on your credit report by a financial institution looking to make a lending decision may hurt your score in the short term. Again, that is known as a hard inquiry. There is another type of inquiry however, and its known as a soft inquiry. Soft inquiries do not hurt your credit score and are the type of inquiry that happens when you check your score on a site like CreditKarma.com. Soft inquiries are also used when companies pre-approve you for credit offers, or when companies pull your credit as part of a background check.
- You should never accept a credit limit increase – Those who fear credit cards, may also fear the idea of having a lot of money being made available to them in terms of their overall credit limit. For this reason, they may look to deny credit limit increases should they be offered by a financial institution. You should not do that! If a credit card issuer offers you an increase in your credit limit you should, generally, accept the increase with open arms. Why? Because having more credit available to you, and not going into further debt, will allow you to reduce your overall utilization ratio. Going back to our equation from #2, if you’ve got a $1,000 balance and a $10,000 limit you’re at 10% utilization. If you’re offered a credit limit increase to $20,000 and still owe that same $1,000 then your utilization will drop to 5% automatically, and you may actually increase your score.
The common theme for each myth that we’ve talked about, is that they all tend to revolve around fearing credit cards. In my opinion credit cards are tools, and like any other tool they should be respected, but not feared. Using credit responsibly, specifically credit from the rewards cards that we often cover on PursuingPoints.com, can open up so many doors for you and allow you to partake in experiences that may otherwise be impossible.
There is a lot of misinformation out there regarding credit scores and cards alike. Once you understand the principles that underly both your score and world of credit cards as a whole, you’ll be able to make more informed financial decisions. Hopefully this post was a step in the right direction.
If you have any questions about what has been covered, please reach out! I am happy to provide any advice and guidance that I can in order to help answer your questions, and alleviate your stresses when it comes to the world of credit cards.