It is hard to determine what is true and what lies about credit cards are. The truth is, it all depends on your credit.
Understanding the FICO Score
To understand if there are lies about credit cards concerning your cards, you first have to understand how the FICO score works with credit. Five categories are important to the FICO score:
- Payment History 35%
- Amount Owed 30%
- Length of History 15%
- Credit Mix 10%
- Credit Mix 10%
[Read: How to Avoid Credit Card Fraud]
Now if you do not have a long history of credit (15%) and it is a poor payment history (35%) then you are in trouble. If your payment history is good, you are in good shape. That doesn’t necessarily get you what you want, though. You could be new to the credit world with low balances on a credit card, paid on it for six months, was able to get a small loan, kept payments up on that. You have been at your job for a year and a half and just got your own place eight months ago. Everything is looking good. Now you need a newer car. The one you’ve been driving since high school is about to die. According to your FICO score, things are looking great:
- Payment History: Payments on time
- Amount Owed: Slightly higher but still good
- Length of History: It was good enough to get that 1st loan
- Credit Mix: Credit card and loan
- Credit Mix: Fairly new credit
This is where your FICO score ends and the rest of your information begins. A lender is going to consider things like:
- Your age
- Your Income
- The years at your Job
- The years at your residence
- The manner of credit you are requesting
- The amount of credit you are requesting
A FICO score is a three-digit number that represents who you are, financially and you got there through credit, including credit cards. So let us clear up some of the lies about credit cards.
Applications and Lies about Credit Cards
The truth of the matter is this: Multiple applications will hurt your score if you are denied by one credit card and you try another and another, and so on. Unless you have flawless credit, it will hurt you at the rate of 10% per application because it is considered a hard inquiry to your credit score. The lies about credit cards are that it will stay on your credit for a long time. This is untrue. If you do not make repeated applications, it usually will drop off your credit record in about two to three months.
Debt-Utilization Ratio and Lies about Credit Cards
The easiest way to explain this debt ratio is:
Total Debt Balance Divided by Total Available Credit Equals Utilization Ratio
$200 ÷ $300 equals 67%
This is an example of a person who has a higher ratio than lenders want to see. Lenders prefer to see a ratio of 30%-35%. If this person could get the Total Debt Balance down to $100 or less, that would put the ratio at 33% or lower.
If cardholders consistently maximize his debt balance to the available balance and just make the minimum payment thinking everything is okay as long as it is current, he or she has bought into the lies about credit cards on this one. The equation above is what matters to the credit bureaus.
Lies about Credit Cards and Carrying a Balance
You have probably been told somewhere that carrying a balance is bad because you pay unnecessary interest so you should pay it off in full. You have probably also been told that it is good because it helps you build a good payment history. Therefore, you are caught in a catch-22. Lenders want to see a pattern of responsible credit payments. If you spent a bit much then go ahead and make a few payments, but make them for more than the minimum. If you want to pay that balance off, wait until your grace period is almost up. The credit card company will report that you paid and you still will not have to pay interest. That is a win-win situation.
Lies about Credit Cards and Closing Accounts
This is one of the biggest lies about credit cards out there. If you close an account, by either you or the extender of the card, it reduces your available credit. The reason I say the extender of the card is that sometimes when a card is dormant, the extender will close the account for non-activity. All available credit is useful on your credit report.
Checking Your Credit Scores and Lies about Credit Cards
Please, please, please, don’t fall for this, if any, lies about credit cards. You need to check your credit reports. The easiest way to access your reports is to go to AnnualCreditReport.org. You can check once per year. There, you can gain access to all three (Equifax, Experian, TransUnion) credit reports. You will be able to download or print them off and look them over for errors. If you find any, you can challenge them. This is an important step in your financial history. You need a report that reflects correct information, without errors. Sometimes things are put on your credit report that don’t belong to you or are no longer supposed to be there. After seven years, most credit (good and bad) should come off, unless it is ongoing. Some things, like certain bankruptcies, can affect your credit for up to 10 years.
[Read: Sneaky Credit Card Fees: They Are Out There]
If you are unsure about something you heard about credit cards, don’t just believe it. Search it out or ask someone. We need to shed light on the lies about credit cards.