Way back when, I used to think the stuff I bought with my credit card was free. Not really, of course, but it can sure seem like that when you never see any money exchanging hands. Credit cards can really lull you into a false sense of financial stability.
There are all sorts of misconceptions about credit cards, all of which have the potential to get you into financial trouble.
Let’s clear up a few of the biggest credit card myths you may have heard:
1. Debit cards can help your credit score just like a credit card.
Unfortunately, this isn’t true. When you use a debit card to pay for things, you’re not borrowing money because the money comes directly out of your checking account. Your credit score is a number that represents how well you’ve handled borrowed money, so only your credit card usage can affect it.
2. Retailers can set a minimum amount you can charge on a credit card.
Not at all! At some retailers, usually small, locally owned businesses, you may see a sign that says “$5 minimum for credit card purchases.” Technically this is not allowed, but since retailers pay about 2% of each sale to the card issuing companies, some businesses restrict their use for small sales. You’re allowed to charge any amount up to your limit, even a penny!
3. If you go over your limit and pay it back before the due date, you’ll be fine.
It’s possible, but not likely. Credit card companies want you to use their card, so most times they’ll happily let you charge over your limit. However, when you go over your limit, card issuers can raise your interest rate to penalty levels, sometimes as high as 30% or more. You may also get hit with an over-the-limit fee, so pay close attention to how much you’re charging.
4. Canceling your credit cards helps improve your credit score.
NO! And as a matter of fact, canceling them may actually lower your credit score because you’ve reduced your capacity to borrow. Your capacity represents the total amount of money you’re able to borrow from all your credit sources. Don’t borrow more than about 30% of your capacity or your credit score may go down.
5. Applying for credit cards does major credit score damage.
Not true, unless you try to open several cards all at the same time. These type of inquiries are called hard inquiries and generally just cause a small temporary dip in your score. Opening new cards will actually help your credit score over time because they increase your capacity to borrow.
6. Carrying a balance on your credit cards helps your score.
If only this were true! The only thing carrying a balance will do is lead to interest charges. It may also give the card issuer a reason to raise your interest rate. It’s best to charge no more than about 30% of your limit each month and pay it off in full when the bill comes due. This activity will be reported to the credit bureaus and have a positive affect on your score.
For more great credit card information that will help you debunk credit card myths, check out our ebook here.
Have any other questions about your credit card? Not sure what’s fact and what’s fiction? Let us know!
Interested in learning more about the latest credit card rules? Check this out.