1) You Should Close Paid Off Credit Cards
If you are trying to get rid of credit card debt, it might seem like a good idea to close your paid off credit cards. After all, it gets rid of temptation and should make you appear more responsible, right?
Not exactly. When you close a credit card, you may cause quite a bit of damage to your credit score. It will lower your available credit, increase your credit utilization and, depending on the age of your credit card, could lower your length of credit history. These are all very bad things for your credit rating.
Unless your credit card has a huge annual fee, keep it after you pay it off. Just put it away and make a small charge once or twice a year to keep the account active.
2) You Can’t Fix Bad Credit
This myth got started mainly because of a lack of information and patience. Credit in fact can be rebuilt, but it takes a basic understanding of how credit ratings are calculated and it takes some patience.
Credit Rating Factors
Your credit rating is just a score based on a mathematical formula, with two factors making up two thirds of the rating. The biggest factor is on time bill pay and the second is credit utilization. In short, pay your bills on time and keep your credit card balances low.
It Takes Time
You can rebuild credit, but you can not rebuild it overnight. Because it takes time to see results, people assume that their credit can not be fixed, but this is not the case. If you start paying your bills on time and start working your credit card balances down, you can start seeing results in as little as 6 months. To go from a poor to excellent rating however, it could take years.
3) Opening A New Account Will Harm Your Score
This is a myth based on a little bit of fact. Opening a new account will only temporarily affect your credit score because of the hard inquiry it puts on your credit report. The negative effect is minimal and short lived however. The inquiry will stay on your account for 2 years, but it will only affect your score for a single year.
Opening a new account in itself will not negatively affect your score and may in fact improve it, if it increases your credit diversity. Generally, the only way opening a new account will harm your score would be if you opened several credit account in a short time period. That could indicate that you are under financial distress.
4) You Need To Carry A Balance
Have you ever heard that you need to carry a small balance on your credit card in order to keep it open and helping your credit score? This could not be further from the truth.
It is never a good idea to carry a balance, even if it is as little as 200 dollars. This is simply wasted money being paid in interest. Instead of carrying a balance, you should try to pay your cards off in full. Then, make a small charge once or twice a year in order to keep your account active. Pay this charge off every month and avoid paying interest entirely.
For most credit cards, it only takes minimal activity to keep them active in the eye of the issuer.
5) The More Credit Cards You Have The Better
You might think that the more accounts you have, the greater your score may be, but this is not always the case.
While you need to have a few credit cards, you also need to have diversity in your credit file. Credit bureaus like to see a mix of credit including revolving credit, home loans, car loans and even student loans. This makes up 10 percent of your score and the better your mix, the better your score.
If you have too many credit cards and lack other loans and credit, your score could be negatively affected because of the reduced diversity.
6) A Good Credit Score Is All Lenders Look At
Do you think that a good credit score is all that you need to qualify for a loan? This is not entirely true. While a good credit rating will help you substantially, it is not the only thing that lenders look at to determine your credit worthiness. They also look at your income, debt to income ratio, employment history and even your actual credit history with them. All of these factors weight into whether you qualify for credit and how much credit you qualify for.
7) Credit Cards Should Only Be Used For Emergencies
If you lack discipline, this might be a good rule to live by, but if you are smart with credit cards, they can be a great financial tool.
Credit cards can be useful for a number of reasons. The most obvious is the potential benefits like airline miles or cash back, but they have more advantages. One of those advantages is fraud protection. While your bank debit card may also have protection, it is generally less damaging for a credit card number to get stolen. The card is no linked to your real money and credit card companies are often more vigilant about detecting fraud.
In addition, credit card statements are often more detailed. They can be used for budgeting because they show you where you are spending money.
Credit cards can be a part of a smart financial plan, just so long as you pay them off entirely each month.