Myths spring into existence because of things we can’t explain. As credit cards are indeed mysterious little plastic things — are they curses, or are they blessings? — it’s no surprise myths on how to manage them well and keep a good credit score have spread from person to person, shopaholic to shopaholic. While some of these credit card myths may have some sense behind them, most of them, if you take them as gospel truth, can actually hurt your credit score and your financial well-being in the long run.
Whether credit cards are a blessing or a curse can depend on how responsible you are with your finances and priorities, and not on how faithful you are with following so-called rules spread by word of mouth and dubious “experts.” Find out which myths you should let go of before it’s too late.
#1: Use prepaid or debit cards in lieu of credit cards.
Okay, this might work if you just know you’ll be ruining your financial health with a credit card (read: impulsive buyers, shopaholics, people who don’t know how to repay the debt). But for the typical responsible adult — which of course you probably are, if you are reading this — credit cards can help you build a solid credit history, whereas prepaid or debit cards do nothing for you in that aspect. So if you are a reasonably organized person who follows your budget and keeps track of your priorities, then it’s likely you can handle the responsibility of being a credit cardholder.
#2: Leave a small balance on your credit cards to boost your credit score.
As we all know, some (if not all) myths rarely ever make sense, and in the realm of credit card myths, this is among those simply mind-boggling ones. Many of us know that any debt must be prioritized. Purposely leaving a balance on your credit cards is just…wrong. It won’t help your credit score at all. So every time you can afford it, always, always pay the balance on your credit cards on time and in full. If you really can’t make it in full, pay as much as you can afford to, and the last resort would be paying just the minimum. Just definitely do not miss a payment! Not only are you setting yourself up for lots of extra interest to pay, but your credit score also won’t look so pretty in the eyes of lenders if you do, as one of the most important things to them is on-time payments. It shows that you are responsible enough to handle proper credit management.
#3: Don’t own multiple credit cards.
Well, this one has some sense behind it: if you just can’t help overspending, or you are quite poor at keeping track of your bills, then owning many credit cards as opposed to just one may hurt you in the long run. But the advantage of owning multiple credit cards is you get to keep your utilization at a minimum. Utilization is your balance as a percent of your total available limit. For example, if your credit limit is P50,000, and you’ve used P10,000, then your utilization is at 20%. Though there’s really no universal rule, keeping your utilization below 30% is reasonable. If you own more than one credit card, you can expand your spending limit without going over the recommended utilization. Plus, if you choose your credit cards right, you get to enjoy more perks depending on the type you get: air miles, cashback rewards, discounts, you name it.
#4: You can max out or go over your credit cards’ limits as long as you pay it back once it's due.
If you happen to hit your credit limit, you probably won’t hear a peep from your lenders, nor the dreaded “Your credit card has been declined” from the waitress or the cashier. But you’re not out of the woods yet. Not only will you be charged a penalty fee for going over your limit, the bank could quietly raise your interest rate and your credit score will also suffer from it. It’s definitely going to go into your bank records, which would show as you relying too much on credit and being a possible credit risk to your lenders. If you think you’re about to max out your credit cards, try calling your lenders and asking for a temporary limit increase.
#5: Don't allow your credit cards’ limits to increase.
At first, it might sound too good to be true: the bank is actually giving you more spending power, like a gift! In actuality, they’re trying to fool you into spending more, so they can make more money off you. If you’re really prone to shopping temptation, then it’s probably best not to fall for their trap. But if you want a credit score boost, this is the perfect opportunity. If your credit cards’ limits are higher and you keep your spending controlled, your utilization will get lower. For instance, if you typically spend P20,000 on your P50,000 limit, that makes your utilization 40%, which is over the recommended 30%. But if your bank offers to increase your limit to P80,000, and you keep your spending at P20,000, your utilization will fall to 25%. So, other than applying for more credit cards to lower utilization, a limit increase is your best chance at a better credit score.
#6: Get rid of credit cards you don't use anymore.
Though it seems to make more sense to just get rid of credit cards that are just sitting in your wallet, it pays to keep them active. Multiple credit cards increase your available credit, thus lowering your utilization (unless, of course, you get carried away with the spending). Lenders also take into account the length of your credit history when computing your credit score, and cutting up old credit cards will lower the average age of your total accounts. The best way to deal with “extra” credit cards is to allocate different types of spending for each card: one for groceries, one for gasoline, one for shopping, and so forth. Or simply keep them active by enrolling them in recurring payments such as cellphone bills or even your Spotify account, perhaps, and then paying them off on time.
#5: Pay above your credit cards’ bill; it's good for your credit score.
If you’re feeling extra generous, you might think of boosting your credit score by paying more than what you owe. While this practice might give you a temporary increase in available credit, it does absolutely nothing for your credit score. Why? Because for scoring purposes, a negative number still shows up as a zero balance on your credit cards accounts. Which is good, but not exactly better. There are other ways to improve your credit score, it’s just that paying above your bill isn’t one of them. All you have to do is: keep your debt low and your credit line high and pay your bills on time. Repeat 100 times.
#5: It's okay to just pay the minimum payment for your credit cards every time.
Don’t make the mistake of thinking you’re only required to pay the minimum amount on your credit cards’ bills each month. Where you think you’re saving money, you actually waste it on interest payments incurred when you leave a balance past the due date. While doing it from time to time when you’re really strapped for cash can be okay, paying only the minimum until you pay the balance off completely would mean racking up thousands of pesos in interest — an amount big enough to invest on something more worthwhile.
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Credit cards are not mysterious, as they should always be. Be a smart buyer by knowing how it works before you apply. Check out our rewards calculator and see quotes instantly with GoBear!