Credit cards

10 things most Americans don’t know about credit cards

Credit cards are so convenient that they have become part of everyday life for many Americans. Given this fact, it’s perhaps surprising that there are so many common credit card misconceptions floating around.

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Since your credit score and how you manage your credit can affect many areas of your life, from applying for a car loan or home mortgage to qualifying for an apartment, it’s important to know the facts. regarding credit cards. Here’s a look at 10 common credit card misconceptions and the truths behind each myth.

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Your credit report shows as debt-free if you pay your balance in full each month

Paying your credit card statement in full each month is a good financial strategy. However, if you want to appear debt-free in the eyes of lenders, you will need to change your payment schedule. Each month, when you receive a credit card statement, your creditor reports this balance to the credit reporting agencies. Even if you pay the balance in full after receiving your statement, according to your credit report, you still carry that balance. To appear debt-free to your creditors, you will need to repay this balance in full by your statement closing date.

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Applying for a branded credit card won’t hurt your score

There is a common misconception that opening store brand credit cards is not the same as opening a general credit card from an issuer like Chase Bank. Since these types of cards can generally only be used in the store where they are issued, many consumers mistakenly believe that they are “private issue” credit cards or that they are not found in the traditional universe of credit reports. The truth is that store credit cards are also issued by banks and are reported to credit reporting agencies just like any other type of credit card.

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Closing Unused Accounts Raises My Credit Score

From a financial planning perspective, it’s true that you shouldn’t have more credit cards than you need. However, if you cancel your unused credit cards, you could end up paying a price when it comes to your credit score in two ways. First, a large part of your credit score comes from your use of credit, or the percentage you use of your total amount of available credit. If you keep a balance on some cards and cancel others, your credit utilization percentage will increase, which will lower your credit score. Second, the average age of your credit accounts is another factor affecting your credit score, although not as significantly as your credit usage. If you close long-standing accounts and reduce the average age of your lines of credit, your credit score will take another hit.

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You must have a balance to improve my credit score

A common misconception about credit cards is that you need to have a balance to improve your credit score. This mistaken belief undoubtedly stems from the fact that you need to use your credit cards if you want to generate positive score reports. In fact, the most important component of your FICO credit score is your payment history, which makes up 35% of your total score. However, just because you’ll have to use your credit cards and pay them off to improve your score doesn’t mean you’ll have to keep an outstanding balance. In fact, another big part of your credit score is how much debt you owe, so carrying a balance will actually reduce points from your score, not add them.

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All credit cards charge more or less the same interest rate

Most credit cards are similar in terms of operation. You benefit from a line of credit and each month that you make expenses, you must repay at least a minimum amount. Anything you don’t repay in full triggers interest charges. However, the amount of interest charged by a card can vary widely. While the average interest rate for all credit cards sits at 14.54%, according to the St. Louis Fed, credit card issuers charge everything from low numbers to a rate approaching 30%. If you know you’re going to have a balance, don’t assume you’ll be charged a low rate. Check with your card issuer to find out what the damages will be in advance.

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You can keep a balance if you earn credit card rewards

The battle for consumer credit card spending has become fiercely competitive, and many card issuers are now offering lucrative sign-up bonuses and ongoing perks to entice customers. Sign-up bonuses of 100,000 points or miles aren’t so unusual anymore, and point multipliers on everything from grocery shopping to travel and office expenses can make using a credit card appropriate. very beneficial rewards credit for the cardholder. However, if you have to maintain an outstanding balance on your card in order to reap these rewards, you are likely paying far more in interest charges than you earn in rewards.

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Paying off overdue debt erases it from your credit history

Making late payments on your credit cards is one of the most damaging things you can do to your credit score, short of filing for bankruptcy. On the one hand, your credit score will take a significant hit, sometimes exceeding 100 points. But the damage is much more lasting than that. Even if you get back on your feet and pay off your overdue debts in full, you can’t erase the fact that you were overdue to begin with. Late payments and account charge-offs stay on your credit report for seven years, even if you pay them off in full. Although the damage to your score diminishes over time, you can’t hide the fact that you missed those payments until they naturally disappear from your report after nearly a decade.

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It never makes sense to pay an annual fee to get a credit card

Credit card companies already make money from interchange fees and consumer interest, so it doesn’t seem fair that you also have to pay an annual fee to own one. However, in some cases, paying an annual fee on a credit card will give you access to many features and benefits that will far exceed the cost of owning the card. Most annual fee cards, for example, offer generous sign-up bonuses that pay more than the first year of card ownership. On an ongoing basis, various perks such as free baggage, club memberships, and/or upgrade seats on airlines can be worth far more to a frequent flyer than the cost of an annual fee. However, not all benefits offer the same value to all consumers, so be sure to only pay for credit cards that offer you benefits that apply to your personal lifestyle.

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Credit reports are always accurate

Credit reports are official records of your financial history, so it makes sense that many Americans think they’re still accurate. The reality is, that couldn’t be further from the truth. According to a Consumer Reports survey conducted in 2021, more than a third of US consumers found at least one error in their credit reports. That’s an incredibly high number for an important financial document that can affect the cost of everything from your car loan to your home loan. The lesson here is to frequently check your credit reports to make sure your information is accurate.

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All you need is one credit card

Some Americans believe that owning just one credit card is the right way to go when it comes to credit scoring and managing their finances. But the truth is, having a combination of credit is the best way to help boost your credit score, and having more than one credit card will often maximize the rewards you can earn. Your credit combination is actually its own category within your FICO score, representing 10% of the overall score. If you can show creditors that you can responsibly handle credit of different types, such as installment loans, credit cards, and retail accounts, your score will improve. Likewise, owning different types of credit cards that offer rewards in different areas, such as groceries, gas, or streaming services, can maximize the total profit you receive from your cards.

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