What Credit Card Companies Don’t Tell You
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FIRST MYTH: Leaving a balance on your credit card helps improve your credit score.
Well, the reality is that, NO, carrying a credit card balance does NOT increase your credit score…it only costs you money because now you pay interest on your unpaid balance. And paying more interest on a credit card DOES NOT increase your score any further than if you paid it off entirely, in full.
Instead, here’s what REALLY helps your credit score…and it’s important to understand this, because I’ll be referring to this later in the video:
35% of your credit score consists of your PAYMENT HISTORY: This means you pay your credit by the time it’s due, without any late payments. And when it comes to this, paying off your bill IN FULL or just making the minimum payment and leaving a balance will affect your score THE EXACT SAME in this category, as long as you just pay on time.
30% of your score is calculated by your credit utilization: this is amount you have available to use, versus how much you actually use.
15% of your score is calculated by the length of your credit history…the longer you have credit, the more robust your score will be.
10% of your credit score is calculated by “new credit” – generally the newer your credit lines, the lower your score will be, and this has a small impact.
10% of your score is calculated by the number and mix of credit lines of you have…it helps to have multiple credit cards, an auto loan, lease payments, mortgage payments, or a variety of different “types” of credit showing you’re responsible at paying all of those off on time.
SECOND MYTH: Too much credit makes it harder to get a house or car loan
Back in the 70’s and 80’s, the conventional thought among mortgage lenders was that if a borrower had access to too much available credit, they posed a higher risk of default because they’d have the ability and temptation to use all of it. However, in the late 1980’s, the FICO scoring method began analyzing their credit files…and that revealed that borrowers were NOT more likely to default on their payment if they had more credit available to them. And the “temptation” of having more credit would not “corrupt” an otherwise responsible borrower who paid on time. In fact, they found that the more available credit borrowers had, the safer they were, and the higher the credit score they should have!
THIRD MYTH: You should cancel cards you no longer use
Unfortunately, doing this could end up dramatically lowering your credit score and in most circumstances, this is a REALLY bad idea that you should avoid. If you have an old credit card you don’t use, just keep it that way…make sure to still keep it open, put it in a drawer, forget about it, put it in the frozen in a block of ice, give it to me so I can buy stuff with it…I really don’t care what you do. As long as you don’t close it.
FOURTH MYTH: Opening up a credit card will lower your score.
The answer to this is one…is YES. Opening up a credit card WILL have a negative impact on your score…but this isn’t as bad as people generally make it out to be. From my experience, overall, opening up a new credit card has such a minimal effect on your credit score…and in some cases, I’ve opened up new credit cards and seen my score actually INCREASE. So when it comes to this, I don’t really worry about it. If it does impact your score, it’s minimal…and long term, there are usually more benefits adding different lines of credit to your account.
FIFTH MYTH: You should use old credit cards to prevent them from being cancelled
And this myth is true. Credit Card companies only have the ability to extend a limited amount of credit to people, and they only make money when people use those cards…so when they extend credit out to someone who just NEVER uses their account, they’ll often cancel those cards so they can extend that credit line to someone else who will actually use it and make them money.
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