Until recently, it could be expensive and confusing for the average consumer to access their credit scores and reports. A side effect of this was a proliferation of rumors about the best way to manage credit. Like any good urban legend, it’s hard to know exactly where these got started. Since Credit Karma launched in 2008 we’ve heard a lot of them and have done our best to put them to rest.
One way that these myths can have an everyday impact on consumers is by influencing how they manage credit cards, the most common form of consumer debt. There are four major credit card myths that come up a lot and need to be retired, mistaken beliefs that can have the opposite effect on a credit score than some consumers imagine.
Carrying a balance helps your credit score
One of the most persistent myths about credit scoring is that it helps your score to carry a balance. The truth is you don’t need to pay a single penny of interest to have a great score. What’s worse, carrying a balance could actually be hurting your score. It is generally advisable to keep your credit card utilization rate (the amount of your credit limit you’re actually using) under 30 percent. Looking at data from Credit Karma members that pulled their credit profile in 2014, we can see that members with a utilization rate between 1 and 10 percent had the highest average credit scores – with scores falling away the closer you get to 100 percent. Lenders want to see that you can use credit wisely, but if you’re using too much of your balance you’re seen as a higher risk. Using your credit cards each month and paying them off will show your creditworthiness and could help your scores.
Missing one payment isn’t a big deal
One of the easiest ways to potentially hurt your credit score is to make a late payment. Being more than 30 days late on just one payment can hurt your score significantly and late payments can linger on your credit report for over seven years. Your credit score is designed to be an indication to future lenders about how likely you are to repay debts in a timely manner, and your on-time payment percentage is an important factor in working that out. Try and develop a system that works for you, to put yourself in the best position possible to not miss a payment. Set up calendar reminders, enroll in auto bill pay or take time to clear outstanding bills on payday. It’s not just your score that could get hit when you miss a payment, some cards also add on late fees and penalty APRs.
You should close cards you’re not using
If a card charges an annual fee, you might be better off closing it. But if there’s no immediate benefit to shutting it down, it could be in your best interest to keep it open. For a start, having more accounts open means a higher overall credit limit – assuming the temptation doesn’t result in you charging more to your cards – and could result in a lower credit card utilization rate, which credit scoring models take into close consideration. If you close an account but don’t curtail your spending, your credit utilization rate will go up and your score could fall. Closing a card can also lower the average age of your accounts. It generally isn’t as influential a factor on your score as utilization rates, but some credit scoring models only look at open and active accounts when calculating the average age of accounts and subsequently your score can take a hit, especially if you close a card that is significantly older than others.
Being an authorized user on somebody’s credit card has no impact on you
Becoming an authorized user on someone else’s credit card is a double-edged sword. You’re generally not legally responsible for the debt associated, but your credit score can be affected for better or worse, since credit bureaus typically treat these credit cards as if they were your own. These cards can add years of positive credit to your report, but on the flipside, if the primary account holder misses a payment, you can miss a payment. If they have a high credit card utilization rate, you might as well. For many people, being an authorized user on someone’s account is seen as a pathway to building credit, but in the wrong situation it can have the exact opposite result.
Bethy Hardeman
Credit Karma Chief Consumer Advocate