Let’s face it … there are so many moving parts to managing our finances, it’s hard to keep everything straight. This certainly applies to credit cards, which have their fair share of misnomers. Let’s take a moment to bust some common myths.
“As soon as you pay off a credit card, close the account.” Just the opposite … this is the time that your credit score actually benefits from your actions. You now have a zero balance and available funds to borrow from. This is the formula that improves your credit rating. If you’re worried about running up debt again, destroy the card but keep the account.
“Keeping a balance due on your card improves your credit score.” This is wrong for the same reason as above. While on-time payments are a positive, any balance you carry from month-to-month includes interest charges and has a negative impact on your available funds-to-debt ratio.
“Using your debit card regularly helps your credit score.” Not really. It is true that if using your debit card prevents you from running up credit charges, that is an indirect help. But debit cards themselves don’t have anything to do with credit. Funds are drawn from your account immediately with the transaction. Further, you actually want to use a credit card from time-to-time, and pay it off promptly, to build up a demonstrated history of handling credit properly.
“Pay off your student loans and mortgages first.” Not usually. Often, these are debts with low APRs and have tax deduction implications. You’re generally much better served by paying off debt with the highest interest rates first. These are the bills that demand your attention because a larger percentage of the payments you make are going interest, not principle. If you don’t have much debt, you still may be better off by paying down these loans at a slower rate and using funds you might otherwise use here, to add to a retirement or savings plan.
Whether you’re saving for the new home, new car, or a big family event, getting your credit under control is a key part of the process. Hopefully these tips will help you keep moving in the right direction.