By Rachel Podnos, J.D.
Learn more about Rachel on NerdWallet’s Ask an Advisor
Credit cards are a cornerstone of Americans’ purchasing habits, but knowing how to use them is important. And part of that is knowing how to separate truth from myth when it comes to credit cards.
Myth 1: Credit cards are dangerous
and should be avoided
You’re actually better off paying with credit than with debit — if you use your credit card correctly (only spending as much as you can pay off completely each month). In addition to offering signup bonuses and rewards programs that offer points, airline miles and cash back, credit cards also serve the very important purpose of helping you build your credit score and history. Without a credit history to look at, future lenders (for mortgages, car loans, etc.) won’t give you a loan without a co-signer.
Myth 2: Credit cards are for purchasing things you don’t have the money to buy otherwise
Absolutely not! Credit cards are a way to pay for things that you can afford while potentially participating in a rewards program and, more important, building credit. In fact, if you are spending more on your credit card than you can pay off and accumulating a large carry-over balance, you’re actually going to lose a significant amount of money in the long run because credit card interest rates are typically very high.
Myth 3: Credit card debt is not that urgent
Credit card debt is problematic for so many reasons — high interest rates, the negative impact on your credit score, not to mention the sleepless nights and stress it can cause. If you go into credit card debt, paying it off as soon as possible should be your No. 1 priority. As mentioned above, the interest rates on credit card debt are typically very high. If your balance and interest rate are high, making the minimum payment each month will likely only cover the accrued interest and won’t even touch the underlying debt. This could go on forever.
Myth 4: Checking your credit score
lowers your credit score
Not necessarily. Your credit score gets dinged only when a “hard” inquiry is made into your credit history. A hard inquiry occurs when someone pulls your credit report because you have applied for a credit card, loan or other form of credit. When you check your own report, it’s a “soft” inquiry and does not affect your credit score at all. Thus, you can and should check your credit report and score at least once a year to make sure nothing slips through the cracks and negatively affects your credit. In other words: Pay your credit cards in full — and make sure your credit report doesn’t say otherwise.
Myth 5: There is no penalty
for maxing out your card
The percentage of your available credit that you use each month — called your credit utilization — is tracked by credit bureaus and factored into your credit score. If you max out your card, using 100% of your available credit, it makes you look like a lending risk and is a big red flag to creditors. It will therefore negatively affect your credit score. Most experts recommend using no more than 30% of your available credit each month — per card and overall. This way, you are building credit, but not using too much credit.
Myth 6: Opening many accounts
will help your credit score
Some people faced with the problem of having maxed out all of their available credit think the solution is to open more accounts. In reality, this is a red flag. It will result in more hard inquiries, which will lower your score. Closing old accounts also can’t do much to help your credit score, and may actually hurt it. That’s because it shortens your credit history and leaves you with less credit — meaning that your credit utilization amount will be higher.
There you have it — six credit card myths debunked. You will be just fine, however, if you remember this simple formula: Use a credit card, pay it off on time and carry no balance from month to month.