Building a strong credit score is one of the best financial moves you can make. Credit cards are great tools to help you build your credit score if you know how to go about it. If your credit card literacy is lacking, however, you can just as quickly get yourself into trouble, with your financial future buried under piles of credit card debt.
Do you know how credit cards work? Have you bought into some of the many myths that circulate about how credit cards impact your credit score? Find out how much you know about credit cards with this true or false quiz.
Correct Answer: False. When it comes to building your credit score, credit cards are more useful than cash or debit payments. Not having any debt history means that you do not have a credit score, which makes it incredibly difficult to secure a substantial loan or access other financial instruments.
Correct Answer: False. Carrying a balance does not hurt your credit score, but it does not boost it either, so in this respect, making minimum payments achieves nothing at all. On the other hand, by carrying a balance, you will incur extra costs in interest. To avoid these extra costs, pay your credit card bills on time and in full every month.
Correct Answer: True. When you apply for a new credit card, your credit score may take an initial hit due to the inquiry/pull that you make. If you are a responsible individual, however, and do not increase your spending, the extra credit available through your new card will improve your credit utilization ratio, and with it your credit score.
Correct answer: False. While it may help you avoid more credit card debt, the closing of a card will also reduce your available credit limit and thus hurt your credit utilization ratio, which could impact your credit score negatively.
Correct answer: False. Your card may still incur interest, even if you have paid off your balance in its entirety. Your lender calculates interest for the period between your billing and your payment. This interest is called residual interest.
Correct Answer: False. Credit agencies are looking for a "healthy" mix of credit on your report to prove that you are comfortable with debt and capable of responsibly handling it. Such a healthy mix ideally includes mortgages, student loans, and other types of credit, in addition to your credit card debt.
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