Whether you’re currently dealing with debt, have recently gotten out of debt or want to avoid it completely, understanding how credit cards and credit scores work is a must. There are many credit score myths floating around out there and a lot of them focus on how using or having credit cards impacts your score. Learning to manage credit cards is an important step when it comes to boosting your score. Knowing how a credit card will affect your score is just part of the process of increasing your knowledge of personal finance.
Carrying a Balance Raises Your Score
One of the more popular credit score myths states that carrying a balance on your cards boosts your score. The myth might stem from a misunderstanding of how credit reporting works. Credit bureaus do look at how much you are charging to your card each month, but the balance is usually the amount on your statement at the end of the billing period, not the amount you didn’t pay that month, according to US News and World Report. Carrying a low balance on your credit card (less than 30%) won’t harm your credit score in most cases, but carrying high balances on your credit card may lower them. Your best option, for your wallet and your credit score, is always to pay your credit card in full by the due date.
You Can Spend Up to Your Limit
Having a $10,000 limit on your credit card doesn’t mean that it’s a good idea to spend up to the limit. Your score is determined in part by how much of the credit available to you that you’re using. Borrowing up to or near your card’s spending limit can be a red flag for lenders, suggesting that you won’t be able to pay it back. Instead of looking at your credit limit as the amount you’re allowed to spend, come up with a spending limit that fits into your budget. You’ll avoid going into debt and won’t damage your score.
The More Cards You Have, the Better
In some ways, having more credit cards can help you when it comes to your credit score. The more cards you have and the more spending limits you have, the lower your credit utilization ratio, or the lower the amount of your balance compared to the amount you’re able to borrow. But, when you open those cards, it can have an impact on your score. Scores often drop slightly after you open a new account. If you open several accounts at once, doing so can ding your score significantly. Additionally, part of your score is determined by the variety of credit you have, meaning that having only credit cards might not look good to a lender.
Canceling a Card Raises Your Score
Canceling the cards you don’t use might sound like a good idea, but doing so can also lower your score, for a few reasons. When you cancel a card, the amount you’re eligible to borrow drops and your credit utilization can increase, causing your score to drop. Plus, if you cancel an account that you’ve had for years, it can make your overall credit history look shorter.
If you are struggling with credit card debt, one of the best things to do is stop using your cards and focus on paying down your debt. Cut your cards up or freeze them, but don’t call and cancel your accounts. Once you get back on your feet, re-establishing your credit history will help you get your score back on track.