It’s tempting to take the advice of well-meaning friends and family – after all, they have your best interest at heart.
But when it comes to matters of credit advice, be wary of taking tips and suggestions from others.
Unless they’ve worked in the industry or done in-depth research, most people don’t really understand how the credit system really works.
For example, here’s some credit advice you should never listen to.
1. “It’s OK to max out your credit card.”
Someone may tell you that running up your credit card balance to the limit is a way to get your credit line increased. This is rarely the case.
Actually, maxing out your card will likely cause your credit score to drop, since the ratio of debt to available credit accounts for 30 percent of your overall score.
Credit card issuers view this as a red flag and won’t risk giving you more credit. In fact, you may even find your interest rate increasing as a result.
2. “It’s fine to just pay the minimum amount due.”
While this is technically a true statement, it’s not good advice. When you pay only the minimum amount due on your card, you are reducing the amount you owe by a very small amount, if at all.
Doing this means you will continue to pay interest for far longer than you have to. Paying the minimum due on a $5,000 credit card bill would take nearly 20 years to pay off!
“Your best bet is to learn from
the experts about what to do.”
3. “The more cards you have, the higher your credit score.”
There is no direct correlation between the number of cards you have and your credit score. However, there is a relationship between the amount of available credit you have and your credit score.
For example, if you have a single card with a limit of $10,000 and a balance of $7,500, then your debt to available credit ratio is 75 percent – not considered good by the card companies.
But if you have four cards, each with a $10,000 limit and that same $7,500 balance, now your debt ratio is less than 20 percent, which is seen as positive by the card companies.
Just don’t rush out and apply for more cards, as that can have a negative impact on your score.
4. “Play the balance transfer game.”
There are people who will advise you to transfer balances to a low or zero-interest credit card until the rate goes up and then transfer again. While this seems to make sense, it is very difficult to do effectively.
For one thing, transferring a balance can cost a lot in fees. For another, these cards are getting harder to acquire.
It takes an excellent credit rating to get approval for most zero-interest cards, so if your balance is high already, chances are you won’t qualify.
Instead, work toward paying down your balance with all of your resources. You may then find that your credit score has improved.
Your best bet is to learn from the experts about what things to do and what to avoid. Even advice that is well-intended can be wrong and end up getting you into more credit trouble.
If you really want to increase your awareness of good credit practices, check back here often. We’ll tell it to you straight and get you back on track.
Photo source: creditadvice.ca.