Credit cards can be a little mysterious. Each issuer provides cardholders with pages of terms and conditions, and they can be difficult to understand.
Fortunately, credit cards — and how they affect your credit — don’t have to be a complete mystery.
Let’s discuss — and dispel — five common credit card myths.
1. Canceling your cards can help your credit score.
There is no doubt that the misuse of credit cards has hurt many cardholders’ credit scores, but closing the accounts will not help. In fact, that will have the opposite effect. The act of canceling a card, by itself, reduces the amount of credit you have been extended. For a given amount of debt, this will increase your debt-to-available credit ratio (or your debt utilization ratio), which is one of the major credit scoring components. So if you are having trouble with credit card debt, you might want to cut your cards in half or freeze them in water to inhibit spending, but don’t close the accounts.
2. Opening up a new credit card will hurt your score.
Closing all of your accounts will hurt your score, but opening up a new account will usually help your score. Doing so will increase your credit history while reducing your debt-to-credit ratio (for a given amount of debt). But be careful; opening up too many accounts in a short time period and all of these credit-score inquiries will drop your score. Fortunately, this effect is both small and temporary.
3. You can’t receive the same sign-up bonus more than once.
Credit card sign-up bonuses seem like they are too good to be true. And once cardholders feel like they have gotten away with receiving a sign-up bonus for a credit card they barely used, they might feel like they shouldn’t push their luck. Relax, credit card issuers are so eager to attract new business that they will rarely deny a sign-up bonus to applicants that wish to become reacquainted with their products. Among the major credit card issuers, American Express will grant customers only one sign-up bonus every 12 months for a business and once for personal cards. With other issuers, there are no strict rules and many credit card users report receiving the same bonus multiple times.
4. Banks don’t want your business if you pay your balance in full.
Among credit card issuers, those who avoid paying interest on their credit cards are sometimes called “deadbeats.” And while this term may sound negative, there is no doubt that credit card issuers still earn a healthy profit from those who pay each month’s statement balance in full. Even without receiving interest payments, card issuers still earn money from merchant fees. Also known as swipe fees, these amount to 2% to 3% of each credit card transaction. In addition, there are annual fees, late fees and foreign transaction fees.
Furthermore, card issuers such as American Express still offer charge cards (as opposed to credit cards), that require cardholders to pay their balances in full each month. Finally, those who pay their credit card statements in full every month represent the least risk of default.
5. If you cancel your card, you will lose your sign-up bonus.
Sign-up bonuses may have minimum spending requirements, but there is no going back once the bonus has been rewarded. Bonuses in the form of airline miles or hotel points remain in users’ accounts regardless of whether they continue to hold a co-branded credit card. In the case of bank reward programs, cardholders usually must have at least one eligible card account open in order to retain access to their points. For example, if a cardholder has multiple credit cards that earn Citi ThankYou points, a customer can cancel one of the cards and still retain all of his or her points. Also, cardholders are free to spend their rewards before closing related accounts.
If you’re concerned about creditors or your debt in general could be impacting your credit, you can check your three credit reports for free once a year at AnnualCreditReport.com. If you’d like to monitor your credit more regularly, Credit.com’s free Credit Report Card provides you with an easy to understand breakdown of the information in your credit report using letter grades, along with two free credit scores, and they are updated monthly.