Think you’ve got credit cards all figured out? While some of the things you’ve heard about credit cards may sound reasonable, a lot of the time these whisperings aren't always true
It doesn’t matter if you’re new to credit cards or a seasoned user. According to PwC, there are significant gaps between what we think we know about credit cards and our ability to answer even basic questions about them correctly.
Unfortunately, these misconceptions could be stopping you from getting the most out of your plastic. With this in mind, we’ve rounded up the top credit card myths people commonly fall for so we can set the record straight.
1. I never overspend, so I don’t need a credit card
Credit cards are a form of borrowing. So who needs one if you always live within your means, right?
Well, using a credit card doesn’t automatically mean you’ll end up in debt. If you don’t spend more than you can afford and you pay the full balance on time each month, it’s unlikely that this will happen.
More importantly, while credit cards allow you to buy now and pay later, this isn’t their only benefit. Other advantages include:
Building up your credit score
Making small, regular purchases and paying your balance in full each month shows lenders you can handle credit responsibly and builds a history of reliable borrowing behaviour. This is one of the most effective things you can do to improve your credit score.
Free purchase protection
Anything you buy with a credit card that costs between £100 and £30,000 is covered by section 75 of the Consumer Credit Act. You’re entitled to a refund from your credit card provider if your item is faulty, gets damaged during delivery or doesn’t show up.
Free anti-fraud protection
This covers you if someone steals your credit card details and goes on a shopping spree.
Cashback and rewards
2. My bank already knows me, so there’s a greater chance they’ll give me a credit card
Credit card providers — and lenders in general — do take your past dealings with them into account. However, this is only one of several factors they consider.
Most lenders also want to know other information, including:
- Your current income
- How much debt you have
- Whether you’ve defaulted in the past
This helps them assess how likely you are to use your new credit card responsibly and, so, how “risky” you are.
Most lenders can get this information by looking at your credit report. So, a company you’ve never dealt with can know just as much about your finances as your bank.
Besides, thanks to the new open banking rules, your bank can share your transaction and spending data with other lenders. This means that, with your permission, lenders you’ve never dealt with will soon be able to look at your past dealings with your bank.
3. I’ll always get the advertised annual percentage rate (APR)
The annual percentage rate, or APR, is often one of the key selling points when choosing a credit card. However, it isn’t guaranteed.
The Financial Conduct Authority allows lenders to advertise an interest rate as “representative” if 51% of their customers get this rate or lower. But that leaves 49% that could get a higher rate, including you.
Like other forms of borrowing, credit cards are all about risk. Lenders want to make sure you can pay back what you borrow. So, ultimately, whether you’ll get the advertised APR boils down to your credit history and your credit score.
4. Having too many credit cards will negatively affect my credit score
Some people think having access to “too much” credit can make it harder for them to borrow in future. But the number of credit cards you have doesn’t directly affect your credit score. It’s how you use them that counts.
On the one hand, owning several credit cards has its advantages:
It raises your total available credit, which helps keep your credit utilisation low.
Using different credit cards for different things can help your credit work harder (as long as you stay on top of your repayments). For example, you could use a cashback credit card for day-to-day purchases and a 0% purchase credit card to spread the cost of big ticket items interest-free.
On the other hand, your credit score will dip slightly whenever you apply for a new credit card.
Unless there are other issues with your credit report, this dip is usually temporary. That said, you should avoid making several credit card applications close together. This can give lenders the impression you’re struggling to pay your debts even if it isn’t true, which will make it harder for you to get credit in future.
Use an eligibility checker. Some of the cards on your ClearScore offers page even show a guaranteed APR rate.
5. Carrying a balance on my credit card will help my credit score
This myth goes something like this:
Credit card providers are businesses, and they profit by charging interest. If I pay my balance in full each month, my lender will make less profit. As a result, they’ll be less likely to want to lend to me in the future, and so my credit score will go down.
Put simply, this is untrue.
Leaving a balance on your credit card doesn’t help your credit score. If anything, it makes your purchases more expensive, because you’ll have to pay interest on the outstanding balance.
6. Cancelling unused credit cards will help my credit score
Some people think having credit cards they don’t use can turn lenders off. But an inactive credit card doesn’t affect your score. On the contrary, it can actually help it, for two reasons.
Firstly, lenders like it when you don’t use all your credit because it shows you can borrow sensibly. As a rule, it’s usually best to use 50% or less of your overall credit limit. Cancelling a credit card will lower your overall credit limit. As a result, it’ll look like you’re using more credit, even if you aren’t, which could negatively affect your score.
Secondly, lenders like stability, so long-term credit relationships usually have a positive effect on your score. If you’ve had the credit card for a while, cancelling it will lower the average age of your credit accounts. As a result, you may see your credit score dip slightly.
For these reasons, it may be a good idea to keep your card, even if you don’t use it. Instead, consider charging a small recurring payment, such as your Netflix subscription, and always pay it off in full.