3 Credit Myths Exposed

Myth: Paying interest on your credit card balance each month increases your credit score because credit card companies make money from the interest you pay.

Fact: Paying off your cards in their entirety each month positively effects your credit score more so than maintaining a balance you pay interest for.

“Credit card companies make a percentage from every purchase you make.”

The less debt you have against your revolving credit, the higher your credit score will be. One of the variables used to calculate your credit score is called “revolving utilization”. This is the percentage of revolving credit you have debt against and has 1/3 of the weight against your credit score. The less debt you have against your revolving credit, the higher your credit score will be. Paying your credit card balances off each month not only saves you the money that would have been spent on interest, but it also drops your revolving utilization which helps to improve your credit score.

This myth seems to be perpetuated because of the implied relationship between credit card companies and your credit score. Even if they were that closely related, credit card companies make a percentage from every purchase you make. Therefore, they are more interested in your purchasing activity than in the amount of interest you pay each month.

Myth: Closing credit card accounts will increase your credit score.

Fact: Closing credit card accounts has a dramatically negative effect on your credit score.

“Make sure that before you apply for a credit card, you will be able to live with that card for a very long time.”

When you close credit card accounts, you are lowering your total credit limit considerably. Without wiping out the same amount of debt at the same time, you are effectively raising your revolving utilization and usually, by a very considerable amount. Before closing credit card accounts, you should consider carefully the effect this may have on your credit score and if it is really worth it.

This should also make you more cautious about applying for new credit cards. Do your research and make sure that before you apply for a credit card, you will be able to live with that card for a very long time.

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Myth: Paying cash for everything will increase your credit score.

Fact: Not using credit responsibly will have a negative impact on your credit score.

“Your credit report is a historical record of how responsibly you use your credit.”

Some people seem to believe that having no credit means you have good credit. This is definitely not the case. Your credit report is a historical record of how responsibly you use your credit. If you don’t build that historical record, then your report won’t reflect much and won’t be a good indicator to creditors on whether or not they should issue you credit or maybe even a service like with cell phones. In order to gain access to new credit and sometimes services, you need to build your credit and do your best to maintain a good credit score. While you may save money paying cash for that new car because you have leverage to bring the price down, it won’t do anything for your credit.

Also, some people shy away from credit cards because they fear their own lack of discipline with regards to controlling their spending. A good idea for these kinds of people might be to start out attaining credit cards that only give them enough total credit limit to match their monthly net income. In this way, they can safely max out their credit cards without accumulating massive amounts of debt. It will also help these people to pay off their cards every month which will also assist in building their credit.

Posted in Credit Cards