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5 Credit Myths (and Truths)

Most of us have at least one credit card, whether it's a no-fee cash back card for petrol and groceries or a vacation card with a long list of perks. But how much do we really know about the plastic in our wallets (and how it affects our credit score) outside of tapping them at the counter?

In August, we polled 1527 Canadians to see how knowledgeable they are about credit. What did we learn? Although the vast majority (79%) of respondents describe themselves as "knowledgeable," with those earning more than $40k per year (and having more than one credit card) claiming to be particularly well-versed, a surprising number of respondents still have misconceptions and bad information about their credit.

It is critical to have accurate credit card information regardless of your age or economic level. To that aim, we've put together a list of five popular credit card myths (along with their matching realities) below:

Myth 1: Cancelling a credit card won’t affect your credit score

When asked if leaving previous credit cards active was helpful for your credit score, 36% agreed, 33% said it had no effect, and 9% said it would actually damage their score.

The truth

On the surface, canceling an old card once it's been replaced seems reasonable, but credit works a little differently. To establish your credit history, experts recommend keeping your oldest credit card active (even if it's simply to pay one modest recurring charge each month).

Your credit history keeps track of how long you've had credit, how old your oldest active card is, and how many credit cards you've had or have now. It aids in the creation of an image of you as a borrower and has a significant impact on your credit score. The better off you are, the longer and more complete your credit history is.

Closed accounts can stay on your credit history for up to ten years, so while the consequences may not be apparent right away, they can ultimately reduce your credit history and harm your score.

But what if your previous card has an annual charge attached to it? Should you still be paying for it with a card you hardly ever use? In this instance, speak with your bank about switching products. Downgrading to a no-annual-fee card is a wonderful method to keep your previous card open without spending any money.

Myth 2: It’s good to keep a balance on your credit card

According to our poll, more than half of Canadians (58%) feel that having a debt on a credit card is bad for your credit score, while 20% believe it has no effect at all, and 10% believe that carrying a charge from month to month will actually enhance their credit score.

The truth

Paying up your bill in whole (and on time) every month is the greatest method to enhance your credit score. Because the average annual percentage rate (APR) on most credit cards is 19.99 percent, paying the minimum or even a portion of your debt at billing time will enable interest to accrue, ballooning your principle balance and making it more difficult to pay off the whole. This is why it's critical to keep track of your credit card usage. If you set a hard limit, you'll always know you'll be able to pay off your account in full and avoid the dreaded interest.

Myth 3: More credit use = better credit score

44% of people polled thought that using more than 50% of your credit would harm your credit score, but 26% thought it would have no effect, and another 11% thought it would be helpful.

The truth

While using your credit card is a good thing (having a debt of zero every month isn't either), using too much of it can hurt your credit usage ratio and, as a result, your credit score.

Your credit utilization ratio is the percentage of available credit that you utilize each month, and it has a significant impact on your overall score. Experts advise limiting your credit use at approximately 30% of your overall credit limit. That implies if you have a $10,000 credit limit, you should make sure you don't spend more than $3000 every month. Even if you pay it off in full every month, consistently exceeding your suggested credit usage level makes you appear riskier to potential lenders, perhaps jeopardizing your ability to obtain a loan or mortgage in the future.

Myth 4: Having multiple credit cards helps your credit score

When asked what influence applying for new credit cards would have on their credit score, the Canadians polled were split: 38 percent feel it would be bad, 28 percent believe it would have no effect, and 18 percent believe it would enhance their score.

The truth

In most cases, applying for a new credit card will lower your credit score. New applications are accompanied by a rigorous credit investigation, which generally results in a few points being deducted. While most individuals may quickly recover from this with a year of careful bill payment, the harm could be more severe if you already have a less-than-perfect credit score or a shorter credit history. This is why experts advise establishing solid credit with your first card before applying for other cards. Not only will lenders feel more comfortable granting you new cards if you have a high credit score and a solid credit history under your belt, but the obligatory hard credit inquiry won't hurt you nearly as much.

Myth 5: Requesting a credit limit increase won’t affect your credit score

Once again, Canadians appear to be divided on this subject. Requesting a credit limit increase from your provider would damage your credit score, according to 29% of respondents, while 36% feel it would have no effect and 17% believe it would be a net advantage.

The truth

Requesting a credit limit increase from your provider will frequently result in a hard credit inquiry, which might harm your credit score, similar to applying for a new credit card. A lot of elements will determine how well you weather this (and whether or not your issuer will grant you the increase at all).

First and foremost, determine where you are in terms of credit. Have you just accepted a raise or a new job with a better salary? Is your credit in general in good shape? If this is the case, requesting a credit increase is a good idea. A larger credit limit improves your credit usage ratio (as long as your expenditure doesn't skyrocket) and boosts your overall score. Plus, because of your increased income and purchasing power, lenders will be more willing to extend you the additional credit you require.

If your salary is lower, you have a poor credit score, or you've lately sought more lines of credit, you'll seem to your lender as a high-risk borrower. In this case, your prospects of receiving a credit increase are minimal, and the impact to your credit score that comes with a hard credit inquiry might cause a lot more damage. For these reasons, experts believe that you should wait to request for a credit limit increase until you're in a better financial position.

The bottom line

The findings of our credit card study for 2021 revealed some fascinating and helpful information about Canadians' credit awareness. While many respondents believed they had a good understanding of what would and would not harm their credit score, the responses show that there is still a lot of misinformation out there, and knowledge is power when it comes to personal finance.