When I tell people that I’m a credit card consultant and writer, I’m often asked questions like, “What’s the best credit card?” (Answer: It depends.) But I also get to hear a lot about what typical people think about credit cards.
And although I’m a big fan of using credit responsibly to maximize your rewards, misunderstanding credit cards can cost you big time. You could end up paying extra fees, wrecking your credit score and ending up with overwhelming credit card debt.
Here are some of the most common misconceptions about credit cards that I hear all of the time.
Myth No. 1: Having a lot of credit cards will hurt your credit.
Having several credit cards doesn’t hurt your score, so long as you use them responsibly.
If you pay your bills on time and don’t carry a balance, each card will add positive information to your credit report. If you do that, having multiple credit cards can actually help you maintain a healthy credit score.
Of course, if you miss payments or amass debt, it can hurt your score, but this is true if you have one card or 10.
You can use the official FICO score estimator to see how your score compares when you have one card, versus several.
Spoiler alert: Having six or more cards will give you a better score -- so long as you can manage them all responsibly.
Myth No. 2: Credit card issuers hate it when you pay your statement balance in full
It’s easy to imagine that the credit card industry prefers customers who regularly carry a balance on a card that charges a high interest rate.
And to an extent, it does, but that doesn’t mean that you’re making the companies upset when you pay your balance in full. Don’t feel bad for your card provider as your rewards pile up, because it makes money off of you, too. That money comes from the merchant fees they receive with each transaction, as well as any annual fees you pay.
Those who pay their balances in full tend to be wealthier customers who spend more, so there’s plenty of volume there. But most importantly, those who pay their balance in full every month are at a very low risk of delinquency or default.
Myth No. 3: Carrying a balance will help your credit
If you believe card issuers only profit from those who carry a balance, then it’s a short leap to thinking that carrying a balance will help your credit. And I’ve met plenty of people who have been purposely carrying a balance, incurring needless interest charges, based on this misconception.
In fact, the opposite is true. When you carry a balance, this debt is reported to the consumer credit bureaus, and it will hurt your credit. It raises your credit utilization ratio, which is the percentage of your credit compared to your credit limits at any given time. The two most important factors in your FICO credit score are your credit utilization and your payment history.
Myth No. 4: Your credit score will affect pre-employment background checks
If you are being considered for a job with financial or security responsibilities, then you may be asked to submit to a pre-employment background check. This can sound like your credit score will be judged, but it won’t.
These checks look at your credit history, which has a much more detailed picture of your financial position.
In contrast, a credit score is just a number that’s designed to represent the likelihood of repaying a loan. So someone with a limited credit history could have a low credit score but also no evidence of being a security or financial risk.
Myth No. 5: You should never close your oldest credit card
I hear this a lot, especially from people who are trying to read up on credit. It’s true that the age of your oldest account is a factor in your credit score -- but closing your oldest credit card doesn’t remove it from your credit history.
Your length of credit history will remain the same regardless of whether you close your oldest card. Either way, your credit utilization and your payment history are several times more important to your credit score than your length of credit history.
The bottom line
There’s a lot of misinformation about credit cards and consumer credit floating around, and it can be difficult for busy people to sort out myth from fact.
By understanding these five common misconceptions, you can make the right decisions about your use of credit cards and how you manage your credit.
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