10 Credit Card Myths Debunked By The Experts
MYTH: Owning Credit Cards Improves Your Financial Standing
FACT: When you’re young, countless people will tell you the only way to build up a credit rating is by using credit cards – and the more the better. But this isn't necessarily true. “Your credit rating is determined by the different types of credit you have (which could include a student loan, a mortgage and credit cards), as well as other things such as the length of your credit history, how many times you've applied for credit recently and the amount of debt you have,” explain the experts at HSBC. In fact, if you end up owning and using more credit cards than you can afford to pay off, it may well have the opposite effect.
MYTH: You’re More Likely To Be Accepted For A Credit Card From Your Existing Bank
FACT: It’s easy to think that if your bank already knows you, they should trust you enough to give you a credit card. But it will probably surprise you to hear that this isn’t considered when the bank processes your application. “Sometimes, your current bank will limit the perks available to you, as you’re already a customer,” warn the team at Totally Money. “Another provider may offer you a greater range of perks to encourage you to become their customer.”
MYTH: You Only Have To Make The Minimum Repayment
FACT: Anyone who either has or is thinking of getting a credit card will be aware that this is technically true. But that doesn’t mean it should be your only strategy. “It is really important this is avoided,” says the HSBC spokesperson. “Making the minimum repayment on your credit card can mean it takes years to clear a credit card debt and can see you repay a significant amount in interest.” Where possible, try to repay your balance in full or as much as possible.
MYTH: Missing A Payment Won’t Impact Your Credit Rating
FACT: It’s easy to believe missing the odd payment here or there can’t make that much of a difference to your overall credit rating – especially if the amount you owe isn’t that much. However, the experts say this is far from the truth. “While your credit rating looks at your borrowing history and financial activity over a period of time, even missing one payment on your credit card can negatively impact your credit rating,” advises HSBC. “It’s important to stay on top of things, otherwise you may find you’re limited in what you can borrow in the future. Setting up a direct debit can prevent you from forgetting to make your repayments.”
MYTH: A Low Interest Rate Is All That Matters
FACT: If you don’t plan to pay off the full amount each month, then you will end up paying interest on the remaining amount – this is known as the annual percentage rate (APR). This is an important consideration if you plan to pay interest on the debt, but if you're going to pay off the full amount each month, it might not be as important. “If this is the case, you want to weigh up the cost of a higher APR against other benefits such as air miles or rewards,” advises HSBC. So, look into what else the credit cards terms offer you, beyond just an attractive APR.
MYTH: Interest Becomes Payable Immediately After Purchase
FACT: According to the Money Matters team at Sainsbury’s Bank, this is a common misconception about credit cards. “Interest starts to accrue only the day after your payment is due, meaning that if you pay off your balance in full by the due date, you’ll avoid any interest whatsoever. This effectively makes your credit card a borrowing facility – which can be very useful for managing cashflow if done sensibly,” they explain. However, this doesn’t apply to cash withdrawals, where interest tends to be charged immediately. You might find some cards offer 0% interest on purchases for a set amount of time – but the Money Matters team advises being aware that the interest-free period begins from the date you open the credit card, not the date you first use it. “Once that period ends, if you haven’t paid the balance in full, interest will accrue on a daily basis. And the same is true if you revolve a balance, i.e. carry a balance over from your previous statement: there is no interest-free period for subsequent purchases.”
MYTH: You Should Buy Something Using Your Credit Card Each Month, Or Cancel It
FACT: People mistakenly believe that if they don’t use their card, the lender will take it away. But the truth is, if you’ve got a card, it’s absolutely fine to use it as sparingly as you’d like. “Closing a credit account reduces the amount of credit available to you,” adds the team at Totally Money. “So, depending on how much you’ve used across your other cards, you could increase your overall credit utilisation.” However, using over 25% of your available credit is not looked upon favourably by lenders, so your credit score will decrease if you do.
MYTH: Getting Rid Of Old Credit Cards Boosts Your Credit Rating
FACT: While you might imagine there’s a national system which sets your credit rating for life, the experts say this is simply not true – in fact, every lender scores you differently. “The processes they use to determine your credit score vary, and it’s not always the case that closing old cards will help,” warns the Money Matters team. “It depends on your own personal circumstances, but long-standing accounts with good histories can be beneficial to your score – and closing an old card can actually reduce your available credit, which in turn increases the share of available credit used, thus potentially harming your score.” You might not be aware that credit scoring depends greatly on trying to predict your future behaviour, too. “While a poor credit history will invariably count against you, having little credit history at all makes you an unknown quantity – and therefore a potential risk in lenders’ eyes,” adds the Money Matters team.
MYTH: Maxing Out Your Credit Card Is Absolutely Fine
FACT: Many people believe that if the bank has given you a certain amount of credit, there’s no problem in using it all. But going over 25% of your credit limit across all your cards can lower your credit score, as it suggests to lenders that you’re struggling and having to resort to credit for day-to-day living.
MYTH: A Credit Card Will Only Leave You With Massive Debt
FACT: While you should never forget that credit equals debt, it’s also important to remember that you’re in control of how much you spend and how you manage your repayments. “If you pay off the full amount you owe every month, you won’t get into debt or pay interest charges,” explains the experts at HSBC. “However, if you’re worried that the temptation to spend may be too much, it’s worth considering whether a credit card is right for you.” Before applying for one ask yourself the following question: why do you want the credit card and what will you use it for? “If you decide to take out a credit card, setting yourself clear rules can help you avoid spending more than you’re comfortable with,” adds HSBC’s spokesperson. “You can also look at setting your credit limit at a smaller amount to start with, so you can reduce the chance of getting into any trouble.”
For help managing credit card debt, or debts of any nature, contact one of the following organisations:
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