When used correctly, credit cards offer quite a few financial benefits. They can build your credit score, which has a big impact on your life. The best credit cards also have plenty of other valuable perks, including cash back or points on purchases, sign-up bonuses, and 0% intro APR offers.
Unfortunately, there’s a lot of misinformation about the right way to use credit cards. Some of these credit card myths can cost you, so let’s separate fact from fiction.
1. You should carry a balance because it’s good for your credit score
Your credit score is made up of several factors. The most important is your payment history — if you pay bills on time, you’re probably going to have a good credit score from that alone. Another factor is your credit utilization, or the amount of your credit that you use.
You may have heard that instead of paying off your credit card in full, you should carry a balance from month to month to improve your credit score. There’s no reason to do this. Lower credit utilization is better for your credit. If you pay off your credit card in full, that will keep your utilization low and benefit your credit score.
Carrying a balance won’t make a positive difference in your credit. It will result in monthly interest charges that you could have avoided by simply paying your credit card bill in full.
2. You only need to pay the minimum
When you get your credit card bill, it will have a statement balance and a minimum payment amount. The statement balance is the amount you currently owe.
It’s true that you technically only need to make the minimum payment. People who are new to credit cards often fall into this trap. They only pay the minimum because it’s a much smaller amount, so they’ll have more money to spend.
The problem is that when you only make minimum payments, it takes an extremely long time to get out of debt. Because credit cards have high interest rates, you also end up paying a massive amount of interest during that time.
For example, you have $5,000 in credit card debt at a 21% APR (the average right now is 21.51%, according to Federal Reserve data). If you only pay the minimum, it will take you over 23 years to pay that off, and you’ll pay over $8,000 in interest.
3. You should never use credit cards
Not everyone is a fan of credit cards. Some people, including financial gurus, are staunchly anti credit card. They say that you’re sure to go into debt if you use credit cards, that you aren’t going to beat the banks at their own game, and that it’s better to pay for everything with your debit card or cash.
If you swear off credit cards entirely, you’re going to miss out on all the benefits of using them. Here are a few of the reasons why it’s smart to use credit cards:
- You’ll build credit if you use a credit card and pay the bill on time. Your credit score plays a part in the interest rate you get on loans, passing a credit check to rent a home, and even how much you pay for insurance.
- Credit cards are a safe way to pay. They have excellent fraud protections — most card issuers have zero-liability fraud policies for cardholders. If your card is ever lost or stolen, you just report it and your card issuer will mail you a new one.
- Many credit cards include valuable perks. For example, cash back cards could get you 1% to 6% back on purchases. Some cards also have complimentary insurance protections, such as purchase protection, extended warranty coverage, and rental car insurance.
Credit card myths like the ones above can have serious financial consequences. When in doubt, do a little extra research to make sure what you’re hearing is the truth.
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