Credit cards are used daily by many Americans. Credit cards can be a large risk or an asset for consumers who are trying to build credit or manage their finances. Credit cards can serve as a great financial tool — if they are used wisely.
Understanding facts and myths about credit card use will help you manage your credit and your credit score or credit history.
The University of Alabama’s Dr. Melissa Wilmarth offers some valuable insight.
- MYTH: Never get a credit card. Using pre-paid or debit cards are better for your credit score and credit history.
- FACT: Pre-paid cards and debit cards do not have an impact on your credit score or history. Using credit cards can have both positive and negative impacts on your credit score and history. Responsible use of credit cards will help you build good credit history and improve your score. This includes not overspending on your credit cards, making on-time payments, paying off your balance and managing your credit limit and interest rates.
- MYTH: Carrying a credit card balance improves your credit score.
- FACT: This is absolutely not true. You should pay your credit card bill each month on time and in full. If you can’t pay your balance in full, you need to pay at least the minimum payment on time. I recommend that if you can’t make a full payment, then pay what you can over the minimum (even if it is only $1), as this is the best way to pay off your balance and start making payments on the principal each month. The amount you owe account for about one-third of your credit score. This doesn’t mean you can’t have any debt, but, instead, keep it in check by trying to utilize 30 percent or less of your overall credit limit.
- MYTH: Paying my credit card payment a little late is ok.
- FACT: Approximately 35 percent of your credit score is determined by your payment history. Being one day late will impact your credit score. If you can’t pay your balance in full by the due date, make sure that you are making at least the minimum payment by the due date to have an on-time payment. Together, paying on time and as much as you can on your bill will help build and maintain your credit history but not cost you as much in interest and penalty fee payments.
- MYTH: Closing a credit card will remove that card from your credit history and score.
- FACT: Even if you close an account, that account will remain on your credit history for about seven to 10 years. This is especially important for things like late payments. Maintaining responsible credit card use is the best way to protect your credit score and history.
Wilmarth is an assistant professor in the department of consumer sciences in UA’s College of Human Environmental Sciences.
