It seems that few Americans are actually bothering to carry cash around these days, partly as a result of credit card convenience and reward programs. However, when so many credit card rewards seem too good to be true, how can you separate fact from fiction and myth from truth? Let’s get to the bottom of some of the most persistent credit card myths out there right now.
1. Applying for a Credit Card Hurts Your Credit Score
Simply put, applying for a credit card will not hurt your credit score—up to a certain point. “New credit” enquiries account for about 10% of your credit score; in other words, your credit score will always carry a record of how many credit cards you’ve applied for.
That said, most people have nothing to worry about. Unless you’re applying for a new credit card every month, you’re not going to see much of an impact on your credit score.
2. Your Credit Score Improves When You Cancel an Unused Credit Card
Conventional wisdom seems to hold that canceling the cards you don’t use will improve your credit score; but keeping those accounts open, even if you’re not using the card, can actually work in your favor.
Your credit score is determined in part by how much of your available credit you’re actually using. For any of your unused credit cards you’re using 0% of the available credit on that account. This works to your advantage.
However, if the cards in question have a monthly fee that you don’t want to pay, closing the unused, fee-laden ones is probably the right move.
3. You Can Earn Rewards While Carrying a Balance
One of the biggest advantages of carrying a credit card is the promise of earning rewards. To fully take advantage of card-holder perks, you want to make sure you’re paying off your entire balance every month.
The credit cards that have the best perks typically make up for it with astronomical interest rates. While you might be earning small rewards by paying just the minimum balance every month, you’re almost certainly going to be paying more in interest than you’re earning back in rewards points.
4. Earning Points and Miles Isn’t Worth It
You might be tempted to think that earning points or miles isn’t worth it. The truth is, if you pay off your balance on time every month, credit card rewards are definitely worthwhile.
Studies have revealed that paying with cash can be a big help when you’re trying to stick to a budget. A psychological switch is flipped in our heads when we pay with a credit card, which tricks us into thinking we have more money than we do.
That said, forswearing credit cards entirely isn’t necessary. If you make a habit of paying off the balance promptly, the points you earn simply by making your regular purchases can definitely add up over time.
5. You Can’t Get a Credit Card Just for the Sign-Up Bonuses
Here’s another myth that’s false, but carries a number of caveats. There are some great credit card sign-up bonuses out there right now, which can make it pretty tempting to sign up for a card, make off like a bandit with the bonuses and then stop using the card.
Remember what we covered above: signing up for an excessive number of credit cards (i.e. just for the sign-up bonuses) will begin to impact your credit score over time. That said, if an offer is too good to pass up, applying for a new credit card now and then for the sign-up bonuses isn’t going to kill your credit score.
6. Lowering Your Credit Limit Can Improve Your Credit
Having a large credit limit on your cards can be a double-edged sword. Maintaining a lot of available credit is beneficial to your credit score, but you might be more likely to spend since you know you have credit available.
However, before you use your credit card to make the down payment on that new Mustang you’ve been coveting, remember that a high credit limit will only help you if you don’t use it. What you definitely don’t want to do is ask for a lower limit; keeping a lot of unused credit will work in your favor in the long run.
7. Your Credit Score Will Take Care of Itself
Finally, let’s finish off with a reminder that having good credit is more complicated than just paying off your credit cards every month. Credit scores have a number of purposes, and chief among them is to help determine your overall fiscal responsibility.
Even if you’ve never let a balance carry over from month to month, there are still a number of factors that go into determining your credit score: how many open accounts you have, how many cards you use regularly, etc. Maintaining good credit requires something of a strategy, and knowing how to play the game is something we all have to learn at one point or another.