Are you feeling confused by credit cards? You're not alone! There are many mixed messages about credit cards and how to use them. To clear up the confusion, let's take a look at a few common credit card myths, and the truth behind them.
Myth: Credit cards only lead to debt.
Fact: When used responsibly, credit cards are a helpful financial tool.
Credit cards offer many benefits. They make it fast, easy and convenient to pay for day-to-day purchases. Compared to cash and debit cards, credit cards have greater fraud protection. Some cards even offer cash-back rewards and other perks. If you're new to credit, getting a first time user credit card can also be a useful financial tool to help you establish credit history.
On the other hand, a credit card can make it easy to overspend if you're not careful and disciplined. To avoid debt and high interest fees, it's important to be credit smart. This means only charging what you know you can comfortably afford and paying off your bill on time and in full each month.
Myth: You have to carry a balance to build credit history.
Fact: It's better to keep your debt-to-credit limit ratio low.
Credit cards can help you build a solid credit history. But you don't have to carry a balance from month-to-month to do so. In fact, carrying a balance has the potential to hurt your credit and create a cycle of debt. A better strategy is to use your credit card for everyday purchases and then pay off the balance in full each month. This will help you keep your debt-to-credit limit ratio low, helping you build and maintain good credit.
Myth: You should cancel any credit cards you're not using.
Fact: Canceling credit cards may lower your credit score.
If you're not using a credit card, or if you're having trouble with credit card overspending, you may think it's best to close that account. But canceling a credit card could end up lowering your credit score if you're carrying any credit card balances. Lowering your overall credit limit without reducing your balances will increase your credit utilization ratio, which accounts for 30% of your FICO® score. Closing a credit card account (especially an older one) can also shorten your credit history.
If you want to keep a credit account open while avoiding the temptation to spend, take the card out of your wallet and keep it in a safe place. Once you've paid off all your credit card balances, consider canceling the card you don't use.
Myth: Applying for a new credit card won't affect your credit score.
Fact: New credit makes up 10% of your FICO® score.
When you apply for new credit, whether it's a credit card or loan, a hard inquiry (or “hard pull") will appear on your credit report. Hard inquiries occur when the credit card issuer or lender checks your credit when making a lending decision. Hard inquiries will remain on your credit history for two years.
It's true that a hard inquiry could temporarily lower your credit score, usually by a few points. But while a single hard inquiry is unlikely to make a big difference, multiple hard inquiries in a short period of time should be avoided. Too many hard inquiries at once can have a greater impact on your credit score, which may affect your ability to be approved for a new card or loan. If you can, try to wait at least six months between credit applications to limit hard inquiries.
Find the right credit card for you
Now that you know the truth behind some common credit card myths, you might be wondering what type of credit card is right for you. At Wright-Patt Credit Union (WPCU), we offer a variety of credit cards to help you borrow smarter and make life a little easier. Whether you're looking for a low-rate credit card, first time user credit card or cash-back rewards card, we have smart options for every situation!