Let’s play a quick game…
…of True or False:
- Opening a credit card is bad for my credit
- Carrying a credit card balance will increase my credit score
- Having more than one or two credit cards will hurt my credit
- Not using my credit card(s) is bad for my credit
- Closing a credit card will improve my credit
Thanks for playing! Now, remember those answers and follow me for all of the debunking my title promised!
Your credit score may be the single most important number in your financial life. Credit cards seem to carry a stigma as it relates to the precious number that is your credit score, but is it fair?
No, and I will not tolerate such an unjust treatment of my rectangular plastic friends!
Ok, so maybe you don’t hold credit cards in such high regard, but perhaps that is just because you haven’t really gotten to know them yet.
With so many credit card related half-truths and whole lies swirling around the interwebs, it is tough to tell fact from fiction. That is why I am here to set the record straight on the relationship between credit cards and your credit score and to debunk at least a few of these common credit card myths!
Before diving right in, let’s make sure we have a good understanding of credit in general. Your credit report documents your “credit” related activity. These reports are maintained by credit bureaus – the three largest of which are TransUnion, Equifax and Experian. The information on these reports is summarized into a number called a “credit score” and lenders will request credit reports and/or credit scores from one/two/three of the credit bureaus in order to evaluate the related risk behind applications for credit (including loans, credit cards, etc.).
The most common type of credit score is your FICO credit score, which reflects the following 5 factors that interact on your credit report:
Pay special attention to the two most important factors:
- Payment History – Pay your credit card bills on time and in full! Spend only what you have – treat credit cards like debit cards and you won’t go wrong.
- Amounts Owed – including Credit Utilization – Determined based on the amount of credit you utilize vs. the amount of credit that you have available. The lower the utilization the better, as this ratio signals your ability to use credit responsibly. Credit issuers want you to use your available credit, but not too much – try to keep this ratio below 10%
Got it!? If Yes, continue… if No, see here!
Good! Now let’s crack into these Common Credit Card Myths!
And away… we… go!
Opening a credit card is bad for my credit
Not true. When you apply for a credit card, the credit card issuer will request your credit report (this request is referred to as a hard inquiry) and your credit score will be negatively impacted 3-5 points in the short term. In the long term, the increase in available credit provided by your new credit card will improve your Utilization Ratio (a major credit factor) and actually increase your overall credit score!
Carrying a credit card balance will increase my credit score
False! I am not sure who made this up… but I am guessing that they work for the credit card company who is collecting interest on the balances that you carry month to month. While carrying a credit card balance from month to month will not hurt your credit (assuming you are making the minimum monthly payments on time), it will certainly not improve it either. What carrying a credit card balance will do is result in interest charges, thereby reducing the value that you earn out of your rewards earning credit card. Pay off your credit card balance in full every month!
Having more than one or two credit cards will hurt my credit
No way Jose! Having multiple credit cards is not a bad thing (good thing, since I am up to 17 in total) – as long as you are using them responsibly! Your credit score is affected by the factors in the chart above, none of which specifically preclude you from opening and maintaining multiple credit card accounts. While having multiple credit card accounts is more than OK (preferred even, as it will increase your available credit), a lack of proper maintenance is NOT preferred and could cause you to forget about one of your many credit card accounts and miss a payment. Ultimately, this could negatively impact your credit score.
Not using my credit card(s) is bad for my credit
There is no minimum amount of spending that you need to complete on your credit cards in order to maintain your credit. I do all of my spending on a credit card in order to earn valuable points and miles, but for those who do not have a large amount of monthly spending, there is no need to worry! In fact, if you use a low percentage of the credit that you have available to you, you are maintaining a low utilization ratio, which we have determined previously as a GOOD thing! If you have recently opened up a credit card, met the spending requirement and earned the initial sign-up bonus, you may decide to stop using the card altogether…
Before you toss your credit card in the sock drawer, know that card issuers have been known to shut down accounts due to inactivity, so try to do a little bit of spending on each of your credit cards every so often to keep the credit line open!
Here is a rough breakdown of when card issuers [might] close your credit line due to inactivity:
American Express – 2 years of inactivity
Bank of America – 6 months of inactivity
Barclaycard – 6 months of inactivity
Capital One – 2 years of inactivity
Citi – 2 years of inactivity
Chase – 2 years of inactivity
Closing a credit card will improve my credit
And again – NO! Remember the #2 single most important factor on your credit score? That’s right, amounts owed, which factors in your credit utilization! Close a credit card and you sever access to that line of credit the credit card issuer “so generously” provided to you when you applied.
Closing a credit card due to an annual fee? Preserve the credit line! May I suggest…
- Downgrading the card to a “no fee” version
- Shifting the credit line to another card that you have open with that issuer
- Open a credit card simultaneous to closing a credit card, thereby offsetting any potential decrease to your available credit!
Don’t be fooled (by the rocks that I got – sorry for the J-Lo reference but I couldn’t help myself) by all the nonsense! Credit cards are a friend to your credit (and credit score) and the two really do rely on the existence and performance of the other. It is my hope that you leave here wise to the myths that surround my favorite hobby and that you are equipped with the information you need to make some decisions next time it comes to credit or credit card conundrums!
Questions, comments, FREE advice? Send me a note at firstname.lastname@example.org or message AYP on Facebook!
Good Credit is Happy Credit!