Credit cards are powerful financial tools, but they’re also surrounded by myths that can lead to confusion and poor money management. From the belief multiple credit cards could hurt your score to the misconception that applying for a new card always hurts your credit, misinformation about credit cards is widespread. Understanding the intricacies of credit scores is crucial for making informed financial decisions.
Here are some of the most common credit card myths and the truth behind them, helping you make smarter financial decisions:
1. High income means high credit score Truth: Salary doesn’t impact your score, timely payments do.
A prevalent myth suggests that a high income directly correlates to a high credit score. However, credit scores are not influenced by salary but by timely payments and financial behaviour. Maintaining regular payments is essential for a healthy credit score, regardless of income level.
2. Multiple credit cards hurt your score Truth: A few cards won’t hurt, but applying for many at once will.
Another common misconception is that having multiple credit cards can damage your credit score. In reality, it is not the number of cards but the frequency of applying for them that matters. Applying for several credit cards in a short span can negatively impact your score due to multiple hard inquiries, while a few well-managed cards can be beneficial.
3. Closing old accounts boosts credit score Truth: It lowers your credit limit and increases utilisation, hurting your score.
Closing old accounts is often thought to improve credit scores, yet this action can be detrimental. Closing accounts reduces your overall credit limit, subsequently increasing your credit utilisation ratio. A higher utilisation ratio can hurt your credit score, emphasising the importance of keeping old accounts active.
4. Checking your own credit score lowers it Truth: Soft inquiries don’t affect it. Only bank checks might.
The belief that checking your own credit score can lower it is inaccurate; personal checks, or soft inquiries, do not affect your score. Only hard inquiries, typically performed by lenders, might have a negative impact. Monitoring your credit through personal checks is a safe way to stay informed.
5. Closing old credit cards improves your score Truth: Keeping them open strengthens your credit history.
The myth that closing old credit cards boosts your credit score persists, but keeping these cards open can actually strengthen your credit history. Longer credit histories are beneficial, showing lenders a consistent track record, so maintaining old accounts can support a higher score.
6. No credit = Good credit Truth: No credit means no score.
A lack of credit history is often mistaken for good credit. In fact, having no credit history means no credit score at all. To build a credit score, consider taking an overdraft on a fixed deposit as a starting point. Establishing credit is crucial for future financial opportunities.
Misunderstandings about credit scores can lead to poor financial choices. Recognising the factors that genuinely affect credit scores—such as credit utilisation and payment history—enables better financial management. Awareness and education are key to navigating the complexities of credit scores effectively.