Most of us own at least one credit card, whether it’s a no-fee cash back card strictly for gas and groceries, or a travel card stacked with a slew of fancy rewards. But outside of tapping them at the counter, how much do we actually know about the plastic in our wallets (and how it relates to our credit score)?
We surveyed 1527 Canadians in August to find out how much credit expertise they have. What did we discover? The vast majority (79%) describe themselves as “knowledgeable”, with those making upwards of $40k per year (and holding more than one credit card) claiming to be particularly well-versed, but a surprisingly high number of respondents still hold on to misconceptions and bad information regarding their credit.
Regardless of your age or income level, having the right information on credit cards is important. To that end, we’ve assembled a list of 5 common credit card myths (and corresponding truths) below:
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Myth 1: Cancelling a credit card won’t affect your credit score
When asked if keeping old credit cards open was good for your credit score, 36% of those surveyed agreed, while 33% claimed it had no impact at all, and 9% believed it would actually hurt their score.
On the surface, it might sound rational to cancel an old card once it’s been replaced, but credit works a little differently. Experts recommend keeping your oldest credit card active (even just to pay one small recurring bill per month) in order to build up your credit history.
Your credit history tracks how long you’ve been a user of credit, how old your oldest active card is, and how many credit cards you’ve had or currently have. It helps paint a picture of you as a borrower and plays a huge role in determining your credit score. The longer and more thorough your credit history is, the better off you’ll be.
Closed accounts can still linger on your credit history for up to 10 years, so while the negative impact of doing this may not be immediate, it will eventually end up shortening your credit history and hurting your score.
But what if your old card comes with an annual fee? Should you still be paying that on a card you barely use? In this case, talk to your bank about a possible product switch. Downgrading your old card to one with no annual fee is a great way to keep it open without costing you a penny.
Myth 2: It’s good to keep a balance on your credit card
Our survey showed that over half the Canadians we asked (58%) believed that carrying a balance on your card is bad for your credit score, but 20% still assumed it wouldn’t have any impact at all, and 10% said that a sitting balance from month-to-month would actually improve their credit score.
The best way to improve your credit score is by paying off your statement in full (and on time) every single month. Most credit cards have an average APR of 19.99%, so only paying the minimum amount or even a partial chunk of your debt at billing time will allow that interest to accrue, bloating your principal balance and making it more difficult to eventually pay off the total. This is why it’s so important to keep an eye on your credit card spending. If you establish a strict limit, you’ll always know you can pay off your bill in full, avoiding the nasty interest on top.
Myth 3: More credit use = better credit score
Of those surveyed, 44% believed that using more than 50% of your credit would hurt your credit score, but 26% of respondents said they thought it would have zero impact, and a further 11% believed it would be beneficial.
While it’s certainly a good thing to use your credit card (a balance of zero every month isn’t great, either), using too much of your credit will negatively impact your credit utilization ratio, and ultimately, your credit score.
Your credit utilization ratio represents the amount of available credit you use every month, and it contributes heavily to your total score. Experts recommend keeping your utilization at around 30% of your total available credit. That means if you have a credit limit of $10,000, you want to make sure you’re not spending more than $3000 each month. Even if you pay it off in full every month, routinely going above your recommended credit utilization threshold makes you look risky to potential lenders, and could hurt your chances of getting a loan or mortgage down the road.
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Myth 4: Having multiple credit cards helps your credit score
When asked what effect applying for new credit cards would have on their credit score, the Canadians surveyed seem to be largely split: 38% believe it would have a negative impact, whereas 28% believe it would have no effect and 18% say it would actually improve their score.
Generally, applying for a new card will hurt your credit score. New applications come with a hard credit inquiry, which will usually result in the loss of a few points. While most people can bounce back from this easily within a year of responsible bill payment, if you already have a less-than-perfect credit score or a lighter credit history, the damage could be more severe. This is why experts recommend building up good credit with your first card before applying for any others. Once you’ve got a good credit score and respectable credit history under your belt, not only will lenders feel more comfortable issuing you new cards, but the unavoidable hard credit inquiry won’t do nearly as much damage.
Myth 5: Requesting a credit limit increase won’t affect your credit score
Once again, this is an issue Canadians seem divided on. 29% believe that requesting a credit limit increase from your provider would hurt their credit score, while 36% say it would have no impact, and 17% of respondents think it would be an overall benefit.
Similar to applying for a new credit card, requesting a credit limit increase from your provider will often trigger a hard credit inquiry which can hurt your credit score. How well you weather that (and whether or not your issuer will grant you the increase at all) is dependent on a number of factors.
First of all, take stock of where you’re currently sitting credit-wise. Did you recently accept a raise or a higher-paying new job? Is your overall credit healthy? If this is the case, asking for a credit increase would make a lot of sense. A higher credit limit improves your credit utilization ratio (providing your spending doesn’t increase too much) and will reflect well on your total score. Plus, with your improved income and buying power, lenders will feel more comfortable giving you the extra credit you’re looking for.
Conversely, if your income is lower, you have a credit score that needs work, or you recently requested other lines of credit, you’re going to seem like a risky borrower to your provider. In a situation like this, the chances of you getting a credit increase are much slimmer, and the hit to your credit score that comes along with a hard credit inquiry can do a lot more harm. For these reasons, experts agree it's best to not apply for an increase to your credit limit until you’re in a better financial position.
The bottom line
The results of our 2021 credit card survey provided some interesting and useful insights into Canadians’ credit knowledge. While many felt they had a strong handle on what would and would not hurt their credit score, it’s clear from the answers provided that there’s still a fair bit of misinformation floating around, and knowledge is power when it comes to personal finance. Got any opinions on our findings? Leave a comment below and join the conversation!