Everyone handles their credit differently. Some use it to overspend, some keep a watchful eye on their balance, and others refuse to participate in credit card usage altogether for fear of incurring debt.
But how do you sort through all of the myths surrounding your credit score? Here are a few common misconceptions about credit that you need to know.
1. “Keeping a small balance is good for your credit score.”
This is a myth created by credit card companies so that they can profit from your interest. Always pay your balance in full. You can’t be charged interest for a balance you don’t have, and the best way to play the system is by having the money to pay your credit card bills on hand at all times.
2. “You can’t be financially stable without a credit card.”
Although you can use credit cards to build credit and make large essential purchases, it’s a neutral tool. You don’t have to start building a credit history at 18 in order to have a decent score. You also don’t have to wait until you have a comfortable salary in order to start using credit cards.
Whenever you decide to start using a credit card, what matters more than your starting date is the consistency of your habit of paying it off. This builds your payment history, which counts for 35% of your credit score- the highest percentage of all possible categories.
3. “It’s fine if you spend your max limit.”
According to the 30% credit utilization rule, it’s much more beneficial to your credit score if you spend no more than 30% of your limit on a credit card. Those with credit scores of 800 report an average of only 7% usage of their available credit. The less you use the better- you can obtain a higher score with low rates of credit utilization.
4. “Pay your credit card bill as early as possible.”
This myth, although somewhat true, is still slightly misinformed. It’s important to pay all of your credit card bills before the due date, as late payments can be detrimental to your overall credit score. However, if you want payments to count toward your payment history, be sure to wait until at least a day after the statement date to pay it off. By doing so, you ensure that the purchase is processed and counted toward your credit score.
You can also use this early payment strategy to your advantage. If you are planning on spending close to your max limit and you still want to abide by credit utilization rules, pay your balance before the statement date. This way, it does not get counted toward your credit score and you can still enjoy the benefits of using your credit card.
