In this blog, I wanted to talk about the six common credit card myths that many people believe are true, but in reality, they’re really just making some of us think about credit cards the wrong way. So, today, we’re going to list each of these myths and then discuss why they’re frequently misunderstood because knowing the truth about these things can help us be a little bit better off financially.
1. Credit Card Points Allow You To Travel For Free
Let’s just go ahead and jump right into the first myth here. The first myth is going to be that credit card points allow you to travel for free. Okay, so truth be told, credit card points can allow you to cover the cost of certain types of travel like flights and hotels if you redeem them the right way. However, what many people tend to forget is that those are not the only costs that the average person will have when traveling.
As an example, on my most recent trip where I traveled down to Puerto Rico, my girlfriend and I managed to use our Chase Sapphire preferred cards along with the chase points that we had saved up to completely cover the cost of our flights and our hotel stays. So from those points, we essentially got to fly and stay in a room that combined was going to be worth several thousand dollars if we had paid in cash.
So that was pretty cool to see, and we felt like we got a good deal. However, there are some other expenses that we have not yet factored into the total cost of this trip, such as the five-day airport parking that cost us a little bit over a hundred dollars. Then in Puerto Rico, we stayed at a resort, so we still had to pay for food and drinks there. Luckily, the prices were not as bad as I thought they would be, but still, it ended up costing us another few hundred dollars.
And then there are also the miscellaneous things that we wanted to do while we were down there on vacation, like zip lining and kayaking. Plus, we also had to pay cash to get to and from the airport. So all in all, this was far from a free trip, and that’s going to be the case for a lot of people out there who used credit card points to go on vacation. It was a trip that was heavily subsidized by points, so it would have only been a fraction of the cost had we paid in cash, but it was not free.
And I think that’s where a lot of people can get carried away with credit card points if they’re not being careful. They might sign up for new credit cards that have high welcome bonuses and then they might use those credit cards for everyday spending where they can earn some more points. Then they have all those points just sitting there in their credit card account and they feel like they have to use them.
Otherwise, they’re just going to lose value over time. So they pick out a place to travel to, then they use those points to book a flight, a hotel, or both. And like I just talked about, if you’re not factoring in those other costs of travel, or if you’re underestimating what those costs will be, then you could quickly find yourself going over budget for your trip.
So the point here with this first myth is that credit card points can be good, and they can greatly reduce your overall travel cost if you use them wisely. Budget for other travel expenses as well, because otherwise, you might be better off getting a cashback credit card setup rather than a point-earning one.
2. Carrying a Credit Card Balance is Going to Help Your Credit Score
Alright, next for credit card myth number two, this is going to be another very important one to understand. And I also think it’s the most common credit card myth of all time, and that is that carrying a credit card balance is going to help your credit score. So I kind of think that this myth got started from people just assuming that the credit bureaus want to see that we’re actually using the credit that we’ve been given.
And that is true, using a credit limit that you’ve been given on a credit card responsibly is a good thing, but you absolutely do not have to be carrying a credit card balance from month to month to do so, and here’s why. When a credit card issuer extends credit to you, under the terms of conditions, they expect to be paid back within a certain timeframe.
And in that timeframe, if you do not pay back the full amount that you effectively borrowed from them by using a credit card, you’re going to have to pay them a little bit extra, which is called interest. But as long as you’re paying back the full amount that you borrowed as your statement balance before the payment due date, that is still going to show that you’re using the credit that you were given, but you will also not be charged any interest.
Some people will use a credit card and then instead of paying it off in full before the payment due date, they only make the minimum payment or some other payment that is less than the overall statement balance. That way, any remaining amount actually carries over from one credit card statement to the next. But there is really no additional benefit to doing this when it comes to your credit score.
The two most important credit score factors are on-time payment history, which basically means that you pay at least a certain amount by the payment due date, and credit utilization, which just means that you don’t have a balance that is too high relative to the credit limit that you’re given. These two combined factors make up about 65% of your credit score.
So to take advantage of these things while also avoiding any interest charges, all you have to remember to do is pay off your credit card statement balance on time and in full every single month by the payment due date and not just make the minimum payment. And you’ll want to keep credit utilization, or your credit card balance divided by your credit card limit, at 10% or below on each card and across all cards combined. The lower the credit utilization, the better, but ideally you want to aim for somewhere in the low single-digit percentages.
3. You Should Close Credit Cards That You Do Not Use Anymore
Moving along to credit card myth number three, And with this one, it really is going to depend on how you view it. But that myth is going to be that you should close credit cards that you do not use anymore. I would say that if you have a no-annual-fee credit card, especially one that you’ve had open for a very long time, then I would say there’s really no point in closing it because it’s not costing you anything extra each year to keep it open.
And because it’s free for you to continue having that card, you might as well do so since it’s only going to help with your credit score over time. So the age of credit is only going to account for about 15% of our credit scores. And then, as I said before, payment history and credit utilization are the other two main factors that we want to focus on as well.
So my oldest credit card accounts are no annual fee cards, and I just keep them open and use them maybe once or twice a year for a small purchase here and there. That way they stay active, and I can take advantage of and benefit from the age of those accounts at no additional cost to me. Now, if you’re paying an annual fee for a credit card and it’s no longer bringing you enough value to justify paying that fee, then in that situation, you might want to consider closing that card.
See if you can downgrade to a no-annual-fee credit card first, or call the issuer and ask if they’ll give you a retention offer or at least waive the annual fee. However, if you decide to close that credit card, it will not have a negative impact on your credit score, as some people believe. Actually, as long as you close that credit card account while it’s in good standing, that’s going to remain on your credit report for the next 10 years and continue to positively impact your credit score while also showing a good on-time payment history.
The downside to closing a credit card, though, is that you’ll lose the credit limit that was available on that card. That means that your overall credit utilization percentage could actually increase if your combined spending and balances across your other cards remain relatively unchanged. Maybe instead of having combined balances of $1,000 across combined credit limits of $20,000 for a 5% utilization, now you have $1,000 in balances and credit limits of $15,000 after closing a card, so now your utilization is slightly higher at 6.7%.
So the impact might not be that much here or depending on your situation, but it is something to consider and something to be aware of because if your credit utilization does increase by too much, then it might negatively impact your credit score. The main takeaway here from this myth is that credit cards with no annual fee should just remain open for the most part, that way, it’ll help with your credit score over time, and credit cards that do have an annual fee might have other options instead of being closed. But if you do decide to close a credit card, as long as it’s in good standing, the impact should be relatively minor and not as bad as some people might believe.
4. Missing a Credit Card Payment Is Going To Hurt Your Credit Score
And this leads me to credit card myth number four, which also has to do with the impact on your credit score, and that myth is going to be that missing a credit card payment is going to hurt your credit score. Now, this myth is true, but not entirely, so let me explain how missed payments work. So when a card’s billing cycle comes to an end, you’re going to be left with a statement balance, which essentially just reflects the amount of spending that you did during that cycle.
This will be shown on a credit card statement, along with a payment due date, which is going to be about three weeks after your statement closing date. Now you’re also going to see on the credit card statement a minimum payment amount, and that essentially is just the smallest amount possible that you can pay to still have that payment amount reported as being on time.
Of course, this minimum payment amount should just be ignored, and instead, you should focus on the statement balance and pay that by the payment due date. By doing this, you’re going to avoid carrying over any additional amounts to the next credit card statement, and you will not be charged any interest. But if you fail to make that payment by the payment due date, most people believe that that is going to immediately damage your credit score.
However, the truth is that late payments are not reported to the credit bureaus until at least 30 days after that payment due date. So you have some time to make at least that minimum payment if you realize it within that 30-day period. Again, pay it off in full. Do not make just the minimum payment unless that’s all that you can afford. But if you find yourself struggling to pay off credit cards in full, then I would say to avoid credit cards altogether until you find yourself in a better financial situation.
Once that 30-day period is up after the payment is due, that is when you’re going to start to see that negative impact on your credit score. Because your on-time payment history is the most important factor in your credit score. So after 30 days, you want to make that payment as soon as you can, because being 31 days late is better than being 60 days late, and that is going to be better than being 90 days late.
So the sooner you can make that payment, the better. Now, I do want to say that you should not be relying on this 30-day period after the payment due date when it comes to paying off your credit card because that’s just not a good habit to get into. If you do not make that payment by the payment due date, the issuer will almost certainly charge you a late fee.
However, if you forget and are late on that payment, but you realize it and call your issuer, they may be able to waive the fee for you if it is a one-time occurrence. So hopefully that clears things up a little bit about missed payments. Again, the simplest way for anyone to improve their credit score is to have a perfect on-time payment history. Just make those payments on time by the due date and in full by paying the statement balance, and that’ll help your score while also avoiding interest charges.
5. Applying For New Credit Cards Will Also Hurt Your Credit Score
Moving along to credit card myth number five, this is going to be another very common misconception. And that is going to mean that applying for new credit cards will also hurt your credit score. This one is going to be mostly false as well, because it can be a bad thing if you’re applying for credit cards the wrong way.
But overall, I do think the positives of getting new credit cards are going to outweigh the negatives. If you do this responsibly, let me explain what that means. So at first, applying for a new credit card can cause your credit score to drop by maybe a few points or so. And that is simply because a hard inquiry is made when you apply for most credit cards. A hard inquiry occurs when someone obtains your credit information in order to potentially extend you new or additional credit.
And this makes sense, right? If you want to apply for new credit to essentially borrow more money, this could be seen as being a little bit risky until you prove that you know how to handle this additional or new credit by paying it back in a responsible way. Luckily, once you have this credit from a new credit card, and start making on-time payments, you keep credit utilization low and use that credit card in other ways that are responsible and the right way to use a credit card. That will outweigh any minor negative impact on your credit score from the hard inquiry. And after only a short period of time, the effects of that hard inquiry are not going to matter much at all.
After 24 months, the inquiry is even going to fall off your credit report. By having this new credit limit, it is going to be added to your existing credit limits, which could actually decrease your overall credit utilization if your average spending and credit card balances remain relatively unchanged. So it has the exact opposite effect of closing a credit card, as I previously discussed.
Now, the impact of hard inquiries and new credit on your credit score is really all going to depend on you, your credit history, and your overall credit profile. If you’re new to credit, then applying for a new credit card or applying for several new credit cards very quickly is going to have more of a negative impact on your credit score compared to mine with my six or seven years of credit history.
And someone with 20 years of credit history with other loans mixed in there as well who applies for a new credit card is going to feel even less of an impact than me. The world of credit cards and credit is something that takes time and patience. So just be aware of that going into it. But the takeaway from this myth that applying for new credit cards will hurt your credit score is that it can, but it likely will not as long as you’re doing so responsibly.
The benefits from things like potentially decreasing your credit utilization and also getting on-time payments with this new credit card, combined with any signup bonuses and other benefits that a new credit card can offer. All those things can make getting a new credit card worth it in many cases. But only if you pay off your credit cards on time and in full every month will all of this be true. You must also treat your credit cards like cash and only use them if you have the money set aside to pay off the balance whenever you want. I also think it’s really helpful to be aware of your spending habits through some sort of budget so that you don’t overspend with those cards.
6. Credit Cards Get You To Spend More Money
Finally, for the last credit card myth that I wanted to talk about here, I kind of saved the best for last because this seems to be the most controversial credit card myth out there. That is, credit cards encourage you to spend more money. This is an argument that has been popularized by Dave Ramsey, with whom I’m sure many of you are familiar. I like to follow him as well because I enjoy seeing the way that he helps people get out of bad debt.
The argument here is that when you’re using a credit card to pay for something instead of cash, you’re going to feel less pain because you’re not actually exchanging anything like you would with physical cash. It’s just digital numbers on a screen. So that, in turn, could get you to spend more money. And if you overspend, that could easily outweigh any cashback or points that you might earn by using a credit card.
Now, this myth is something that I believe is much more complicated than just being true or false because it is 100% a behavioral argument with how people react when it comes to spending. And no two people are exactly alike. We’re all born into different situations. So we grow up around different people. We have different perspectives on the world and how it works. That leads to different risk tolerances and different habits.
There are so many ways that we’re all different that you cannot definitively say that every single person out there will spend more money by using a credit card. For me personally, this is a myth because I keep track of all the numbers across my different accounts. I hate seeing those numbers go down as I spend money or pay off a credit card balance. I even hate seeing my accounts when the markets are down.
If anything, cash actually feels more like found money to me because I grew up in this digital age. I feel like I would be likely to spend more money by using cash compared to credit cards just because of the way that I budget and keep track of everything by looking at my credit card statements. This is a topic that I’m really interested in exploring in the future here on this website because I don’t think that I’m completely right, and I don’t think Dave Ramsey is completely right either.
It all varies from person to person, so I don’t really think you could say with one true statement that every single person out there should avoid credit cards because they’ll make them spend more money. But for the average person that does follow Dave and his teachings for getting out of bad debt, I do think that for those people, staying away from credit cards can actually be a good thing, and I could agree with him there.