Credit card debt is a common issue in the United States, with the average debt among American consumers reaching $6,218, according to a TransUnion report. Additionally, the latest Federal Reserve data indicates that the average credit card APR is 22.63%. A high balance combined with a high APR can quickly spiral out of control, making it crucial to understand and manage credit card debt effectively. Beyond just high balances and APRs, several myths surrounding credit card debt can mislead consumers. Separating fact from fiction is essential for maintaining healthy finances.
Here are six credit card debt myths you need to know:
Myth 1: Carrying a Balance Improves Your Credit Score
Dennis Shirshikov, head of growth at GoSummer and finance professor at the City University of New York, identifies this as one of the most pervasive myths. “Carrying a balance does not improve your credit score and can actually harm it,” he said. Credit scores are influenced by credit utilization, which is the percentage of your credit limit that you are using. High credit utilization can lower your score, and carrying a balance accrues interest, leading to unnecessary financial costs.
Instead, Shirshikov recommends always paying off your credit card balance in full each month. “This ensures you avoid interest charges and maintain a low credit utilization ratio, which positively impacts your credit score,” he explained.
Myth 2: Closing Old Credit Cards Is Good for Your Credit Score
You might think that closing old credit cards you no longer use is beneficial, but it can actually harm your credit score. “The length of your credit history accounts for a significant portion of your credit score,” Shirshikov explained. “Closing an old account reduces the average age of your credit accounts, which can negatively impact your score. Moreover, it reduces your overall available credit, potentially increasing your credit utilization ratio.”
Shirshikov suggests keeping old credit accounts open, especially those with no annual fee. “If you’re not using them, put a small recurring charge on them and pay it off each month to keep the accounts active,” he recommended.
Myth 3: Applying for Multiple Cards Within a Short Period Is OK
While it might seem advantageous to have multiple credit cards to manage expenses and earn rewards, applying for several cards in a short span can negatively impact your credit score. “Each application results in a hard inquiry on your credit report, and multiple inquiries within a short period can signal to lenders that you are in financial distress or seeking to overextend your credit,” Shirshikov explained.
He advises spacing out your credit card applications and only applying for new cards when necessary. “Consider your credit needs carefully and plan applications strategically to minimize hard inquiries,” he said.
Myth 4: Accepting a Higher Credit Limit Is Always the Right Move
A higher credit limit can help with credit utilization, but it can also lead to overspending if not managed carefully. “Accepting a higher limit might make it easier to accumulate debt that you cannot pay off, leading to high interest charges and financial stress,” Shirshikov noted.
He recommends evaluating your spending habits and financial discipline before accepting a higher credit limit. “Ensure you have a solid budget and stick to it, using the increased limit only if it aligns with your financial goals and not as an excuse to spend more,” he said.
Myth 5: Making Minimum Payments Is Always Enough
Kelan Kline, personal finance expert and co-owner of the personal finance blog The Savvy Couple, pointed out that while making minimum payments might keep you in good standing, it won’t help you reduce a large balance effectively. “The rest of the balance racks up interest, which makes it take longer to pay off the balance,” he explained.
To avoid being trapped in a cycle of perpetual credit card debt, Kline recommends paying more than the minimum whenever possible. “It’ll save you money in the long run and help you clear that debt faster,” he said.
Myth 6: Debt Relief Will Ruin Your Credit Score Forever
Emma Davidson, MBA, a high-risk payment consultant with eMerchant Authority, stated that credit card debt relief strategies like debt settlement can impact your credit, but the effect is not necessarily permanent or catastrophic. “Believing this myth might prevent people from seeking help when they need it,” she said.
Davidson advises educating yourself on the actual impacts of different debt relief options. “Consult with a financial advisor or credit counselor to understand how various strategies might affect your specific situation,” she suggested.
By dispelling these common myths, you can take control of your credit card debt and work towards a healthier financial future. Understanding the realities of credit card management helps you make informed decisions, avoid unnecessary financial pitfalls, and maintain a strong credit score.
