Myth 1: A credit card is not a loan
This myth stems from confusion over how you pay a credit card. Any time you borrow money, you are taking out a loan. With an installment loan, like an auto or student loan, you make payments until the debt is paid off. Then, the loan is closed and you can’t borrow any more. A credit card is a revolving line of credit. You can charge up to a set limit as often as you would like as long as you make the required monthly payments and don’t go over the limit.
Myth 2: Your credit limit resets every month
When you are approved for a credit card, the lender will set a credit limit. This is the maximum amount you are allowed to borrow. For example, if you receive a credit limit of $1,000, you are able to charge up to that amount. This can be a series of smaller transactions that add up to the limit or one large purchase. Some people believe the limit resets every month, meaning they can spend $1,000 each month. But this is not the case. Once the limit is reached, you cannot make more purchases until the debt is paid down.
Myth 3: You need to carry a balance
The balance is the money you spent – borrowed – but have not paid back. According to this myth, if you don’t have a balance, the card activity won’t show up on your credit report. The truth is that as long as you have a credit card open, the lender will report any activity to the credit bureaus. Regardless of whether you pay the entire balance or just make the minimum payment, an on-time payment will appear on your credit report if the payment is made by the due date.
Myth 4: It is good to miss a payment occasionally
Believing this myth could damage your credit standing. The theory behind the myth is you should periodically skip a payment on your credit card and make a double payment the next month to show you are capable of making a larger payment. In reality, you should never intentionally miss a payment. Just one late payment could cause your credit score to drop by as much as 100 points. Late payments also appear on your credit report for two years. The size of the payment has no impact on your credit score, but paying on time is crucial.
Myth 5: Only your payment history affects your credit score
Payment history is one of the most important factors considered when calculating credit scores, but it isn’t the only thing that matters. The balance on your credit card also plays a role in determining your score. The percentage of your credit limit that is unused is your “availability.” A higher availability can help your credit standing.
If you have to carry a balance on your credit card, do not use more than 20% of your limit. For example, if you have a $1,000 credit limit, you would not want to carry a balance of more than $200. Using more than 50% of your credit limit consistently can reflect negatively on your credit score. Sometimes carrying a balance is unavoidable, but try to keep as much of your credit limit available as you can.