Five key facts about credit
A credit card can be a great financial tool if you use it wisely. But there are a lot of misconceptions out there that can get you in a bind if you don't have your credit card facts straight. Let's take a look at 5 key facts about credit that can help you avoid pitfalls in the future.
Let's get started with these common myths:
- Fiction: Applying for a new credit card will only impact your credit score if you use the card.
Fact: Applying for new credit accounts for up to 10% of your credit score, even if you don't use the card. Frequently applying for new credit can hurt your credit score, so make sure you really need that new card before you apply for it.
- Fiction: Paying less than the total minimum payment on your credit card bill doesn't count as a missed payment.
Fact: If you don't pay at least the total minimum payment on your credit card bill, your credit card company may report it as a missed payment. This can bring down your credit score and make it more difficult to qualify for credit in the future. Check your statement for the minimum amount due, and always pay it on time to keep your account current. And remember, paying more than the minimum amount due is a great way to pay down your debt.
- Fiction: A high credit card limit is not a good thing.
Fact: Not necessarily. In fact, if you manage your credit cards wisely, a high credit limit can actually be advantageous. Thirty percent of your credit is based on your debt-to-credit ratio (the amount you owe in proportion to your total credit limit). If you have a high credit limit and you keep your balances low, your debt-to-credit ratio will also be low, so a higher credit limit can help you protect your good credit score. But this is only the case if you continue to keep your balances low.
- Fiction: You must carry a balance on your credit cards to build a credit history.
Fact: You do need to use your credit cards to build a credit history, but that doesn't mean you must carry an unpaid balance. In fact, your best strategy is to use your credit cards and pay off the bill in full each month so you keep your overall debt-to-credit limit low.
- Fiction: The more credit cards you have, the better.
Fact: You don't need to restrict yourself to just one card, but refrain from opening credit cards too frequently. The number of credit cards you carry makes up about 10% of your credit score, so having a large number of credit cards may negatively impact your credit score.
Now that you have a good handle on the basic facts about credit cards—as well as the most common misconceptions—you're on your way to better managing your credit and building a great credit score.