Revolving credit is what financial advisors call a line of credit or credit card. The phrase describes any account that allows you to borrow money repeatedly up to a limit, provided it’s in good standing.
If you didn’t know that, there’s a good chance you don’t know other important things about revolving credit. Let’s debunk common myths about these accounts.
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1. Every Account Builds Credit
You might open a new account thinking it can help you build credit but that’s not always the case.
Some financial institutions will report every payment to these bureaus, good or bad. But others won’t share any details until something goes wrong, like if you miss a due date.
As a result, a loan in good standing may not help you increase your score if a financial institution doesn’t share your entire payment history. An account in bad standing, on the other hand, could lower your score.
When in doubt, always pay your bills on time.
2. The Minimum Payment Will Pay Off Debt
A minimum payment is usually a fraction of your outstanding balance or a flat fee of less than $30. Compared to your outstanding balance, it’s an affordable way to avoid late fees and possible credit damage when things are tight.
Since it’s only a small part of what you owe, the majority of your balance will carryover to the next billing statement. There, it will accrue additional interest and finance charges to increase what you owe, even if you don’t make another purchase.
If you only pay the minimum, you can wind up paying more in fees than your original purchase. That’s why the line of credit experts at MoneyKey recommend you pay as much of your balance as possible.
3. Carrying a Balance is a Good Idea
This next myth comes from a misunderstanding of credit utilization ratios. This ratio shows how much of your available revolving accounts you use each month. It’s one of the components of your credit report, which affects your overall score.
You can figure out what your ratio is by dividing your outstanding balance by the limit of each account.
A common rule of thumb is to keep your ratio below 30 percent of your total credit available. Financial advisors suggest 30 percent because it’s a practical option for people who rely on these accounts to make ends meet.
It’s not the ideal ratio, however. In reality, the folks at Investopedia recommend aiming for 10% or less.
4. Having More Credit Cards Will Hurt Your Score
The average American has 4 credit cards in their wallet —3.84to be exact. This might seem like too many, but there’s no harm in having more than one card. It only becomes a problem if you have trouble paying them off each month, or you find they encourage you to spend more than you can budget.
The key is to use each account wisely, remembering the previous tips about ratios and minimums to help you along. Most cards come with rewards, and you’ll also have a bigger limit available to you in emergencies.
Use These Tips to Borrow Wisely
Have you relied on the minimum too often or declined a card you can afford with amazing benefits? Now you know the truth behind it and other common misconceptions, you can make wiser decisions regarding these accounts.