Credit cards are some of the most powerful tools in your financial toolbox. However, they can also be a source of confusion and anxiety if you don’t fully understand how they work.
Unfortunately, there are plenty of credit card myths that aren’t true—and in this article, we’re going to bust five of them wide open.
Myth #1: Carrying a credit card balance is necessary to build your credit history.
A lot of people believe that carrying a balance on your credit card is how you build your credit history. However, this isn’t true at all. Your payment history has more of an impact on your score than the amount of debt you have or don’t have.
The best way to build your credit score is by paying off your bill in full each month and making sure that you only use about 30% of your available credit line each month (the lower the better).
If you don’t know what type of debt will help or hurt your score, check out NerdWallet’s guide on improving good/bad debt ratio for tips on how to get started!
Myth #2: Signing up for store-specific credit cards boosts your credit score.
You’ve probably seen or heard about the “10/5” trick: if you’re looking to improve your score, then create 10 new credit accounts in a year and close 5 of them. This tactic works because it makes your average age of accounts less than 12 months, which is considered to be ideal.
But here’s the thing: store-specific cards aren’t really credit cards, and they’re not going to count toward that average. As soon as you open up a store-specific card (and even before), the bank will report your new account to all major credit bureaus—and then six months after that first use, they’ll close it out again.
It sounds like no harm no foul—but there are plenty of reasons why this practice isn’t good for consumers or businesses alike:
- Store-specific cards often come with higher interest rates than general-purpose credit cards
- They are usually issued by smaller banks with little name recognition outside their local communities
Myth #3: You should have only one credit card.
I know you’re thinking, “But I thought having multiple cards is bad?” Well, you might want to reconsider your stand. The best credit score is the one that is the most diverse—the more different types of accounts there are on your report, the better it looks for your score.
So having multiple cards can actually help diversify your risk and improve your credit history over time. Not to mention that when it comes down to paying them off on time every month, paying off one card isn’t much easier than paying off five (or six).
Myth #4: Closing unused credit cards is the best way to reduce your risk for fraud or identity theft.
Closing unused credit cards is not the best way to reduce your risk for fraud or identity theft. It can actually backfire and hurt you in several ways:
- Your credit score will take a hit if you close unused accounts.
- You may lose your overall credit limit, which could make it harder to borrow money in the future.
- Closing an account can reduce or eliminate your available credit limit. This makes it more difficult to maintain good utilization levels on other accounts that have lower limits (which can be problematic).
Myth #5: Credit card debt is bad debt.
There are a few reasons why credit card debt is not necessarily bad debt. First, credit cards usually have much lower interest rates than other types of loans, so it can be cheaper to carry a balance on a credit card than on a personal loan, for example.
Additionally, credit cards can be a useful tool for building up your credit history and improving your credit score, as long as you make your payments on time and in full each month.
Finally, in some cases, using a credit card can actually help you save money by taking advantage of rewards programs or cash back offers.
Don’t believe everything you hear about credit cards. Learn the facts and make smarter decisions about how to use them.
The first thing you need to remember is that credit cards are just a tool. It’s important not to become attached or over-emotional about them, because they can be useful when used properly but can also cause problems if you’re careless with them.
Credit cards can be very helpful for building up your credit score(see how) even if you don’t carry a balance from month to month—but there are plenty of other ways to do so as well. You might want to consider using other forms of financing like personal loans or peer-to-peer lending instead of opening new accounts just for that reason alone!
Bottom Line
As you can see, there are a lot of misconceptions about credit cards. If you’re reading this blog post and learning some of these things for the first time, then don’t be too hard on yourself.
Even if you’ve been using credit cards for years, it doesn’t hurt to check in with yourself and make sure that your behavior is aligned with what you want to get out of your credit card use. And it’s never too late to learn something new!
Related: Learn the 5 smart tips when it comes to using your credit card wisely.
So now that we’ve busted these credit card myths wide open, go forth and enjoy the convenience, security and benefits that come with using credit cards!
