Over the years in my interactions with family, friends, and acquaintances both in person and online, I’ve been privy to various (mis)conceptions that people have about credit and I would like to address some of them.
You shouldn’t pay off your credit card in full, because carrying a balance and paying interest results in a better score. This is a myth and, unfortunately, the most common belief I’ve heard from others. Typically, the best practice is to pay your balance in full after the statement comes. You won’t pay interest (see below), it will be reported that you’re using your credit card, and you’ll accumulate on-time payments.
You should never use a credit card, because they charge interest. This may be fact or myth depending on how you use credit cards. Virtually all credit cards have what is called a “grace period,” meaning no interest is charged if you pay off the purchase within two billing statements. Suppose your credit card statement closes on the 15th of the month and your payment is due by the 14th of the next month. If you purchase something on January 20, your February 15 statement will contain that purchase. So long as you pay your credit card in full by March 14, you’ll pay no interest. If you don’t pay your credit card in full every statement, you’ll end up paying interest (disregarding promotional 0% APR interest offers). Even if you do have to carry a balance, keep in mind that you’re probably earning cashback or rewards and cultivating a good credit score that will help you later when applying for other accounts.
You should always use cash, because someone can steal your credit card and you’ll be on the hook for purchases you didn’t make. A myth. Every credit card I know of has procedures in place to deal with charges that creditors don’t actually make. If you see an unauthorized charge, it’s as easy as calling the card company and explaining the situation to them. They will typically ask you for more information, send you a new card, and remove the charge from your account. The same is generally true for debit cards. I’ll discuss this in more detail in a future post, but it’s a lot easier to “get your money back” if your credit card is stolen as opposed to if your cash is stolen!
I won’t ever use all the credit I have, so I should close some accounts or have my limits reduced. Another myth. Having credit and not using much of it is a positive thing for your credit score. Additionally, having any account for a long period of time is another positive that I covered in my last post. Suppose you have an old store-branded credit card and have moved to a place where that store doesn’t exist. I’d suggest doing whatever you can to keep it open.
My roommate/family/spouse doesn’t have good credit and that will bring my score down. Although your address and marriage status may appear on your credit report, the scores of those who live with you or are related to you have no effect on your credit score.
In next week’s post, I’ll discuss more of the facts, myths, and misconceptions related to credit.
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nuisance card: Years ago I cancelled a cc because 1) I had never used it and didn’t plan to; 2) it had a yearly fee; and 3) the general nuisance of dealing with the monthly statement. If my credit score took a hit, so be it.
Thanks, Dr. Lou, for your articles about credit. Very interesting and helpful.
To Candy Wright: You’re welcome!
Annual fees are definitely a good reason to cancel a card that you don’t use. Something I’ll talk about in a future post is the idea of downgrading or switching one card to another. There are lots of caveats with this because sometimes it may not be possible, sometimes it may incur a hard pull, and sometimes, even if successful, the new account age won’t necessarily be backdated to the original card’s open date.
card option: If I remember correctly (many years ago), when I called to cancel that card the person did ask if I wanted to change to another of their cards which had no fee, but also had fewer or no perks. I just wasn’t interested in having another card to keep up with, and of course didn’t have the knowledge you have imparted to us about the subject!