by Anna Davies
Throughout her twenties, Melissa Stewart had always considered herself an astute spender. That's why Melissa, a yoga instructor who budgeted her cash flow and never spent more than she could afford, was shocked when she found herself turned down for a personal loan at her bank. "Because I'd never proven how I handled debt, I was seen as a risk," says Stewart. Eventually, she got the loan — and learned facts about credit cards and other types of credit products. "I had never understood that a loan, in the right circumstances, can be a good thing."
Stewart isn't the only consumer who's found herself confused by the role credit can play in a person's overall financial snapshot. Read on to learn more about credit card facts and falsehoods, and how responsible, well-planned credit card usage can help achieve your financial goals.
False. Part of your credit score — a number which lenders access to assess creditworthiness — is based on your payment history. Even if you can't afford to pay off the whole balance in full, making at least the minimum payment on or before the due date is essential.
True. Consumers are entitled to a free copy of their credit report every 12 months. Some banks and credit cards also offer complimentary credit reports through their own website portals, otherwise, the credit reports are accessible at AnnualCreditReport.com.
False. Your credit score also takes into account how much debt you accumulate, how much debt you carry over from month to month, and how those totals compare to your total available credit limits. This is called the credit utilization ratio.
"I recommend people keep credit utilization below 30%," says Heather McRae, a senior loan officer at Chicago Financial Services, Inc. "For example, if you have a credit card with a $9,000 limit, then you would want to make sure the balance remains below $3,000." Having large balances near the limit carry over from month to month could potentially lower your credit score.
True. Some consumers shy away from checking their credit regularly because they've heard that inquiries may hurt their credit rating. And while it is true that multiple inquiries over a short period of time from potential lenders may lower your credit score, that's not the case when it comes to a personal inquiry. Personal inquiries are "soft" inquiries that won't show up on your credit report.
False. Although it's essential to have a realistic strategy in place to pay off debts of all kinds, there are times when it may make sense to put a large purchase on a credit card and pay the balance off over time. Using a credit card with a low annual percentage rate (APR) on purchases can be a smart option. Also, in some cases, putting a purchase on a card can protect an investment: some cards offer damage or theft protection for a certain time period after your purchase.
False. While a credit card can be a great tool when an emergency occurs, experts say that regularly incorporating your credit card into your everyday spending can be a smart financial habit. Unlike purchasing with cash, purchasing with a credit card — and paying the balance off in full each month — can help you see exactly how you're spending your money each month. Second, many credit cards offer price protection, which could mean that if an item is bought in store or online and the price drops within a set window (typically 60 or 90 days) you may be entitled to a refund of the difference. Finally, many credit cards also offer rewards programs, which means you can accrue points or cash back incentives for everyday purchases.
True. Regularly using a credit card — even just for an automated monthly service, like your gym membership or utilities bill — can help establish a record of on-time, responsible payments, which is a factor in your credit score.
False. A credit score can go up or down, depending on spending, borrowing, and repayment behaviors. If your credit score is lower than you'd like, there are multiple steps you can take to change it. Some of the biggest steps are making on-time payments, reducing balances, and following all terms and conditions. Automating payments is one simple step that could help you avoid accidentally missing a payment, which may result in a late fee or a higher interest rate.
True. When it comes to loan terms, interest rates, and eligibility, mortgage lenders look to past loan behavior. If you've earned a healthy credit score because you have a responsible borrowing history, that could help you qualify for an auto loan or a mortgage.
False. Even if you or your spouse change names, your credit score, which is tied to your unique social security number, remains yours — and only yours. But just because you keep your own individual credit scores doesn't mean your spouse's spending and repayment behavior can't affect your credit history and financial plans.
For example, joint applicants on a mortage loan could find themselves paying a higher interest rate if one spouse has a poor credit history. And if one spouse makes late payments on a joint loan account, then those late payments can negatively affect the other spouse's credit score. Conversely, on-time payments made by one spouse can positively affect the other spouse's credit score.
True. Unlike reviewing your own credit history, a credit company's check on your report is considered a "hard" inquiry, and multiple hard inquiries in a short period of time can hurt your credit score. Instead of applying for multiple cards at the same time and hoping one will accept, it's better to use pre-qualification tools on the credit card's website to determine your likelihood of receiving an offer. A pre-qualification is not a guarantee that you will receive a credit card offer, but minimizing the amount of applications you put in at once will limit the amount of checks on your credit report.
True. Used correctly, credit cards can help you reach financial goals in both small and large ways. For example, a credit card that offers price protection means that if a large purchase, such as a television, goes on sale several weeks later, you may be able to receive a refund for the difference. Credit cards that offer rewards or cash back can help fund travel, or help you save on everyday expenses.
Anna Davies has written for The New York Times, Glamour, Marie Claire, Men's Health, Women's Health, Refinery29, and others.