A good credit score can help consumers with many financial roles, and in particular, offers higher rates of approval and better interest rates on loans and credit cards. However, many credit builders wind up adopting certain credit practices based on popular myths about credit card usage, rather than reality. Here are 3 well-known credit card myths that should be debunked before deciding to apply for a credit card.
Myth 1: Shutting Down a Credit Card is a Terrible Move
Most people are hesitant to close their credit card because they are afraid of their utilization rate and credit line plummeting. These two factors undoubtedly have a significant impact on one’s credit score, but there may be times when a cardholder needs to cancel their credit card.
The truth of the matter: It is not always a bad idea to permanently close a credit card — in fact, some situations may necessitate it. A credit card service provider that charges an annual rate, and is no longer being used, may be too expensive to maintain. However, the impact is variable, and there is a way to mitigate it. It is important to maintain an older line of credit, as well as a mix of credit types and a good utilisation rate. If the credit card under consideration isn’t someone’s only card, oldest card, or holding revolving debt (which would need to be transferred to a different card), it won’t have as much of an impact if it’s closed.
Myth 2: Using the Minimum Monthly Balance is Fine in a Case of Financial Pressure
There is a widespread belief that in times of financial hardship, paying the due minimum monthly balance is acceptable. As appealing as it may sound, doing so will only result in large bills, which is one of the primary causes of high interest rates.
The truth of the matter:
When debts are owed to a credit service provider, regardless of financial situation, it’s best to deposit the maximum amount possible for each statement. According to experts, credit users who pay their bills on time save between 10% and 30% on interest rates each year. When there is an unsettled debt, many financial factors tend to resurface in the human mind, and this condition rarely allows for breathing space for that individual. So, regardless of the financial burden, paying off credit card bills as soon as possible is the best course of action to avoid future debt.
Myth 3: Applying for a credit card has a negative impact on credit score
While applying for a credit card does have an immediate, minor negative impact on credit score, over time it’s possible that a new card will actually improve the cardholder’s credit.
The truth of the matter: A credit card’s recommended utilisation ratio is at least 30% of total credit. If someone has two credit cards with a combined limit of £1,000, the minimum amount of cash that should be in both accounts is £300. For someone who already has credit card debts higher than 40% of their credit limit, adding to the total credit limit is one way to improve their credit utilisation rate.
Credit cards are an important part of financial life, but it is not without myths. Knowing about these myths gives people an advantage over others when applying for new credit cards and using them to their maximum effect.