Home Credit card The Myth of Credit Cards and Credit Scores Costing You

The Myth of Credit Cards and Credit Scores Costing You

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There’s a pervasive myth about credit card balances and credit scores, and it can cost you money.

According to a recent Lending Tree survey, 65% of Americans believe that carrying a small balance on their credit card each month will improve their credit score. The share is higher among younger consumers — 79% of Gen Z believe that, for example, depending on the investigationwhich surveyed 1,323 adults in February.

But that belief isn’t true, according to Matt Schulz, chief credit analyst at Lending Tree. And it can have the opposite effect, depending on how consumers use their cards.

“The problem with this myth: it ultimately costs people money,” he said.

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The myth is likely the result of a tension: Using cards responsibly can help consumers (especially young people) build good credit, but making infrequent purchases with a card can cause lenders to shut them down. .

Some consumers have misinterpreted being a frequent user with the need to maintain a balance on their credit card, Schulz said. (A balance is achieved when consumers make the minimum card payment each month instead of paying their entire bill.)

Making a minimum monthly payment generally keeps consumers in good standing with creditors. But the practice can still hurt your credit score, Schulz said.

A large balance can indirectly reduce credit scores by increasing consumers’ credit “use rate”. This is the ratio of what consumers owe to their total credit limit.

Credit usage is one of the most important factors that determine a credit score, Schulz said. Having bad credit can mean consumers have a harder time getting loans or can trigger higher interest rates on mortgages and other debts compared to someone with good credit.

“Having little to no usage rates is actually a good thing because it shows you’re responsible for paying off those balances when they come in,” he said.

Consumers can achieve this by making a small recurring purchase each month (a phone bill, for example) and then paying off the entire card.

Second, consumers must pay interest on their balance when they do not pay all of their bills. Credit cards often carry high interest rates. The average card had interest rates above 16% last week, as of March 30, according to at CreditCards.com.

Card issuers will likely raise these rates as the Federal Reserve continues to raise its benchmark interest rate in the coming months.

Thirty-five percent of cardholders don’t know their credit card’s interest rate, according to Lending Tree. And 49% don’t pay all of their credit card bills each month.