Busting the myths on credit cards and credit scores

Savings

Julie Hutchison

24th October 2014 at 11:18am

Here’s the dilemma: you need that bargain snapped up quick, that holiday paid for up front or that special occasion booked in advance, what do you do? If you’ve not the spare cash to hand you often reach for the credit card.

There can be no denying they have their time, their place and are undoubtedly convenient, however, they can also be a source of some concern. Worries can start if you begin to struggle on the repayments, get hit by further charges and caught up in a vicious circle of debt. Bad debt can also have the knock on effect of affecting your credit score, making future borrowing difficult.

Credit cards and credit scores are shrouded in both fact and fiction. As forewarned often means forearmed we decided to delve deeper. We got in touch with our friends at the Money Advice Service (MAS) to see if between us we could help bust some common myths and bring you a little more clarity on the credit card and credence to the credit score.

Through some of our own research and consulting with the money expert Nick Hill from the Money Advice Service, we’ve pulled together 7 commonly held assumptions worth busting:

Myth 1: The APR tells me how much my credit card will cost me

Nick says:

The Annual Percentage Rate (APR) tells you how much your credit card will cost if you borrow up to the credit limit on day one and pay it back in 12 equal instalments without making any further purchases, but this is highly unlikely behavior. Although the APR is a useful indicator of what you may pay, it’s not perfect for comparing credit cards nor for comparing them with other types of lending such as a personal loan or mortgage.

Myth 2: I will always get the credit card deal that’s being advertised

Nick says:

You’ve probably seen the advertised interest rate, known as the ‘representative APR’. Whether you get this rate depends on your credit score, which takes into account factors such as your income and credit history.

Myth 3: Leaving a balance on my credit card will help my credit score

Nick says:

Just keeping a balance on a card won’t help your credit score unfortunately. But you can improve it by not exceeding your pre-agreed limit and making all required payments on time.

Myth 4: I recently defaulted on my credit card, but have since paid off the outstanding debt. This will now repair my credit score.

Nick says:

Your credit report contains a factual record of your credit history and only time can heal any credit wounds. Anything like missed payments or defaults are kept on record for at least six years, but the impact of any default on your credit report will diminish over time.

Myth 5: Applying for a new credit card only impacts my credit score if I use the card.

Nick says:

Every time you apply for a credit product it adds a footprint to your file for a year. Too many, especially in a short space of time, can trigger rejections as it makes it look like you’re desperate for credit. However lenders use a variety of criteria to determine your credit score, such as payment history and if you’re on the electoral register.

Myth 6: My credit score will be the same whichever lender you apply to and whichever credit reference agency they consult

Nick says:

This is not true. DifferentJust keeping a balance on a card won’t help your credit score unfortunately. But you can improve it by not exceeding your pre-agreed limit and making all required payments on time.lenders assess risk differently depending on the type of credit or loan you’re looking for and your credit history. A clean credit report at a particular credit reference agency does not mean that lenders will automatically lend to you. They will also look at other information that you provide or that they hold about you, when considering your request.

Myth 7: I’ve heard most cardholders only ever make the minimum payment

Nick says:

This is not actually the case. Most people (around three in five) say that they pay off their balance in full each month and so pay no interest. Cardholders can benefit from the flexibility of paying an amount that suits them each month and this will sometimes be the minimum payment. Research shows that just a fraction of customers tend to pay the minimum for twelve consecutive months

MA can help…

If you’re worried about credit cards or debt in general visit the Money Advice Service website.

We’d like your thoughts

These are just few commonly held myths we’ve uncovered but we’re sure there are many more out there. If you’ve any other myths you’d like busted or experiences you’d like to share on our facebook page, then we’d encourage you to get in touch.

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