Your use of credit cards has a significant influence on your credit score—which means it has an immense impact on your life.
That’s no exaggeration either. Your credit rating greatly affects your ability to buy a home, take out a loan and make big ticket purchases such as appliances. A “good” FICO score is 670 or higher, and the national average reached a record high of 706 in 2019, which is means the average American is well above that standard.
There are a number of ways to sink your score, such as not making your minimum payments. Failing to pay credit accounts on time accounts for a staggering 35% of your FICO rating.
Missing payments is just one of many considerations. And, over the years, flat-out ‘myths’ have emerged which have fooled consumers into thinking that certain credit-card behaviors won’t harm your score—when, in fact, they will. And these miscues can cast a lingering shadow upon your credit standing and, thus, create difficulties when you seek loan approval for major purchases.
Given the consequences, here are a few of those myths, along with the ‘realities’ behind them.
Myth: You can max out your credit card limit and be fine—as long as you pay off the balance every month
Reality: Sorry, but maxing out your limit—or even coming close to it—will send your credit utilization ratio soaring. That’s a bad thing, because the ratio compares the amount of credit you’re using on your cards to your overall available credit. This has a huge influence on your rating, as it represents 30% of your FICO score. Experts say you want your utilization ratio to go no higher than 30%. (On a card with a $10,000 limit, for example, you should carry no more than $3,000 in charges at any given time.)
“It’s best to keep a zero balance as long as possible,” says Michelle Black, credit expert at HOPE4USA.com, a Charlotte, N.C.-based credit education and restoration program. “Even paying them off once a month isn’t ideal in terms of credit management. The higher your utilization ratio, the lower your score will be.”
The ratio is expected to make even more impact starting in the summer of 2020 as FICO has announced that it will apply new credit scoring models that are expected to positively impact – by as much as a 20 point increase—those with a score above 680 who continue to make on-time payments and use 30% or less of their available credit each month, according to Debt.org. Conversely, those with a score under 680 who miss payments and spend close to their credit limit each month could see their scores drop by as much as 20 points. The new scoring system will also take into account your historical usage of credit. If you have steadily reduced debt over the last two years, your score should go up. If you’re steadily adding debt, it may drop.
Myth: If you negotiate with your credit card company for a lower interest rate, your score could go down
Reality: No, negotiating a lower interest rate isn’t the same as trying to reduce a debt settlement, which actually is a bad move. “If you do the latter, you definitely can expect your score to take a hit,” says Casey Bond, Money reporter at HuffPost. “Successfully reducing your interest rates, however, can only help your score. It will reduce your monthly payments and make it easier pay off your balance completely.”
Myth: Closing unused credit card accounts will improve your score
Reality: Just the opposite. If you’re really not using the cards, then they help you establish a whopping amount of unused credit. Which means they’re a credit score asset that you want to preserve. So place unused cards in a safe place where they can’t get stolen, but keep the accounts active. “Closing them will cause your credit utilization ratio to rise,” Black says, “and that’s virtually guaranteed to negatively impact your rating.”
Myth: If I close a credit card which I misused, its history will be erased and my score will improve
Reality: Unfortunately, closing a credit card isn’t like going into a time machine and reversing the credit wrong-doings that hurt your rating. Late payments are allowed to remain on a credit report for as long as seven years from the date of their occurrence. If the account containing late payment information is closed, the entire account will not be removed until after seven years. “It is a clear myth that you ‘lose’ the history of the account by closing the card,” Black says. “But it will, of course, cause the utilization ratio to rise, and you don’t want that.”
Myth: When it comes to your rating, all cards are the same
Reality: Not at all. Especially with retail cards, which encourage greater consumption while carrying heftier interest rates. In addition, they have lower limits and, once again, that plays into the utilization ratio. So while those store cards come with tempting offers—with promises of immediate, hefty discounts on purchases—you need to assess the big picture. “If you have a $100 limit and you charge $90 on the card, you’ll end up with a 90% utilization and that will impact your score very negatively,” Black says.
Myth: Exceeding credit card limits is no big deal
Reality: Only in a shopaholic’s dreams. Obviously, going over the limit will put you above 100% on the credit utilization ratio. “Plus, you’ll be charged a fee every month that you exceed the limit,” Bond says. “That will make it much harder to pay down the balance.”