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Most Americans use credit cards, but many credit card users don’t really understand how these products work. Part of the reason is because we are too busy to take the time to do the research, but also because some card issuers don’t always do a good job spelling out this important information.
So here are some common misbeliefs that many credit card users share.
Actually, canceling your cards may lower your credit score. When you close a credit card account, you’ll reduce the total amount of credit extended to you. As a result, it can raise your credit utilization ratio (the amount of debt you have compared to your available credit limits). Here’s an explanation of how debt affects your credit scores. So if you are having trouble controlling your spending, you might feel like cutting up your credit cards, but don’t close the accounts.
Those who mistakenly believe that canceling their credit cards will help their credit score might naturally think that applying for new cards will have the opposite effect. Applying for new credit results in what is called a “hard inquiry,” which does cause a small, temporary dip in a credit score. Actually, for most credit card users, opening a new account will help their scores over time, as they generate more credit history and reduce their debt-to-credit ratio (for a given amount of debt). The exception is for those with limited credit history who apply for many new accounts in a short period of time.
Some credit card users apply for new cards in order to receive a generous sign-up bonus but then feel bound to keeping their cards until their rewards are used up, for fear of losing them when they cancel their cards. Any time that credit card rewards are offered in the form of points or miles with a third party such as an airline or hotel chain, they are yours to keep, even if you close your credit card account.
On the other hand, credit card reward points issued by banks will usually be forfeited if a cardholder cancels his or her card and has no other open accounts that earn the same kind of rewards. So cardholders can keep their Membership Rewards points earned from their American Express Platinum card after it is closed, so long as the cardholder has another American Express account open that is part of their Membership Rewards program. Check the terms and conditions of your card’s reward program before you cancel your account so you understand exactly what happens if you close your account.
For many Americans, credit card use is synonymous with debt. And they’re not necessarily wrong — many Americans don’t pay their credit cards in full every month. However, a large portion of credit card users avoid interest charges by always paying their entire statement balances in full each month. These cardholders can enjoy a secure and convenient method of payment, a free line of credit and valuable credit card rewards without incurring any debt or interest charges. There is a persistent myth out there that in order to build good credit, you have to carry a balance on your credit cards, but you can pay off your balance every month and still see all of the positive impacts to your credit score. If you want to see how your credit cards are affecting your credit scores, you can see your credit data for free on Credit.com, including your credit scores, a personalized action plan and advice from credit experts.
Banks love their credit card users, but not necessarily because they are so nice. They care so much about credit card users simply because they are so profitable. Even those who never pay interest still generate merchant fees every time they make a purchase. The credit card market is extremely competitive — so every time you find a new offer in your mailbox, or an advertisement online, think of it as another sign that your business is truly valued.
Image: iStock
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