As a first-time credit card user, you may have some difficulties understanding all the rules and regulations that dictate your credit score. This is very common for a first-time user, but the more you learn, the easier it will be to repair your credit score if needed. Getting helpful hints from credit experts or lenders can help you improve your credit score, but following bad advice can drastically affect the sate of your score. Here are a few credit myths that you should avoid:
Myth: Closing an account improves your score
Whittling down your credit card balance can help you get out of debt and improve your credit score, but you should hold off on closing any accounts, even if they're fully paid off. You may think that closing an account will absolve you of your responsibility to this account, but doing so will actually raise your credit utilization ratio, which will in turn lower your credit score.
Instead of shutting down an account completely, only use it to make small purchases. Using the card to make purchases no larger than $20 each week will help you avoid accruing a massive amount of debt and assist you in building credit at the same time.
Myth: Rates never change
Interest rates depend on whether you have a good credit score. The lower your score, the higher your rate will be, which can result in expensive charges, thus making it difficult to pay off your balance. A common misconception is that interest rates are etched in stone and can never be changed, but that is not true.
You can actually change your interest rate by doing a balance transfer. This process involves taking your current balance and putting it on a new card with a lower rate. Many times, the rate is only 1 percent different from your previous one, but this can do wonders to help you pay off your balance and repair your credit score. Before you start transferring all of your balances, be forewarned that you will be charged a balance transfer fee, but your rate can diminish if you have a good score.
Myth: Bankruptcy resolves all your debts
Being stuck in debt may be stressful to deal with, but it is important not to take any easy ways out. You may hear that declaring bankruptcy can be a quick way to absolve your debts, but that could not be further from the truth.
Declaring bankruptcy can be one of the most disastrous things that can happen to your credit score. Not only will it dramatically lower your score, it will stay on your credit report for up to 10 years. Lenders or financial institutions that see that you have a bankruptcy on your report may be hesitant to do business with you. This can affect your chances of getting a future loan or line of credit.
Myth: Debit cards help improve your credit score
Using a debit card can help you pay for items, but it will not have any influence on the state of your credit. According to Forbes, 45 percent of consumers believe that a debit card will have the same effect on their credit score as a credit card. Debit cards use your existing money to pay for things, opposed to lines of credit issued by lenders.
By understanding that you can't use your debit card to help you improve your score, you will be able to curb overspending habits and instead use your checking account to help you whittle down your current credit card balance.