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The 10 Credit Card Debt Myths You Need Debunked

25 July 2022Tassie Milne 5 min read

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For some of us, getting that shiny rectangular piece of plastic felt like a coming-of-age moment. From finally getting a chance to make those online orders (for video games or Amazon) to indulging in a shopping spree worthy of a montage in a movie, getting one almost felt like a rite-of-passage into the “adult world.” However, as some of us have often been told a la Spiderman, with great power comes great responsibility.

While having a credit card, or even some credit card debt, may often feel overwhelming or scary—because, let’s be real, owing money, and especially depending on how much, can be quite a nightmare—it’s important to see how both these tools can actually aid in increasing or maintaining a great credit score.

And if this is your first time having a credit card or finally giving yourself a chance to understand how credit card debt and credit utilization ratio actually work, then it’s time to debunk some myths surrounding the topic.

Although one could argue the best way to avoid credit card debt, the only way to have and improve a credit score, is to actually use a credit card. Debit cards don’t provide the same support that credit cards do in the long run, when it comes to showing your history of being able to spend money and pay it back. As long as you use your credit card responsibly, you’ll be able to show banks and lenders exactly why you can be trusted to make your payments.

Actually, having a high one can work in your favour. ­­Although it may feel daunting to have access to more than $10,000 on a credit card, it’s not something to shy away from. In fact, it might actually be a good thing. While a large sum of money may have you thinking lenders labelling you a big spender, as long as you don’t max out your credit card you actually can use this to your advantage. When it comes to credit utilization ratio—the amount you’re spending in relation to your actual credit card limit—a key rule of thumb is to keep it between 10% to 30%, to help maintain a good credit score. This means it’s okay to spend anywhere from $1,000 to $3,000 a month on your $10,000 credit limit. But, as always, only charge what you can afford to your card, to ensure you can pay it off month by month.

While you might have a high limit, as always, it’s not a good idea to use all of it—or, especially, to go over it. You always want to keep your credit card debt below 30% of your limit. And, if by the off chance, for some reason your card isn’t declined when overspending on your limit, you’re in danger of gravely increasing your interest rate while simultaneously dropping your credit score.

Truthfully, it really depends. Once in a while, your bank will offer you an opportunity to increase your credit card limit. Should you say yes? It really comes down to whether or not you can reign in your spending habits. If you say yes to the credit card limit increase, keeping your spending habits to what they were prior to the increase can help your credit utilization—meaning you can potentially increase your credit score, too! As always, just know your limit and stick within it.

While it seems like a good idea to just pay the minimum balance to satisfy your credit card company, consider the interest you’ll have to pay on the remaining fee. And no, you don’t need to be a mathematician to realize why this is a bad thing. Depending on your interest rate on your card, by paying only the minimum monthly obligation, the rest of your balance will be whatever your interest rate is (which could range on average from 10% to 20%, or maybe even more). Our recommendation is to always pay off your credit card debt balance in full and on time each month, to avoid having to pay interest fees. Remember, by holding off on paying it in full, in the long run you may be paying even more.

Sometimes, more money does mean more problems. When it comes to your credit cards and credit card debt, in this case quality really is better than quantity. While you might be successfully paying off each card fully a month, you also need to consider that sometimes, when evaluating your credit scores, credit reporting agencies will factor in that. In their eyes, there may always be a possibility you could max out all your credit cards in a single day. In most cases, it’s always good to just have two credit cards just in case for whatever reason, one is refused as a form of payment.

While it may seem like a good idea to say adios to your credit card when you’ve finally cleared your credit card debt, this can actually hurt your credit score. Closing a card actually shortens the length of your credit history, which is a factor when it comes to your credit score. Lenders like to see how long you’ve had credit and what your payment history looks like. Although you may not be using the card as often, it is a good way to show off that you’re great at being accountable for your spending.

You’ve probably gotten a sudden quick burst of panic when you realize you missed your payment due day, but don’t think your credit score went from perfect to rock bottom after one mistake. While it’s integral to pay your credit card debt as soon as you can, most credit card issuers won’t report your payments that are less than 30 days late to the credit bureaus. However, don’t make a habit of making late payments, as you may receive a late fee. If it helps, add a note in your calendar for when your balance is due.

Again, this is all dependent. If you’re pretty good at holding yourself accountable when it comes to your credit card debt, using your credit card for day-to-day purchases like gas, groceries, or that spontaneous splurge you’ve been wanting to do, isn’t really a bad thing. As long as you keep your credit utilization ratio within the sweet spot of 10% to 30% a month, while also paying off your debt, you’re doing a great job at improving and maintaining your credit score.

Stop right now (thank you very much!). There is nothing embarrassing about having credit card debt. Most of us have been there and most of us have also learned how to get ourselves out of it, too. It’s okay to talk about it and to try to understand what you can to do pay off your loans. If having credit card debt means having the opportunity to understand how you can reassess your budget and spending habits, while also building your credit and credit score, that is one of the best things to come out of that shiny card (outside of the fun purchases you’ve probably made on it).

The bottom line

Owning a credit card doesn’t have to be scary. As long as you equip yourself with the knowledge and facts you need to ensure you know exactly how to use it—and what to do when it comes to your credit card debt—you’re on track for building a formidable credit history and score.

And, if you need a better understanding of where you’re starting out when it comes to your credit score, you can do that today. See your credit score in minutes. It’s free, forever.

Tassie Milne Image

Written by Tassie Milne

General Manager - ClearScore Canada

Tassie heads up ClearScore Canada. She lives in Toronto with her husband and two young boys. In her free time, she can be found at the family lake house or playing ball hockey.