Quiz - How Do Credit Cards Work?

credit score

 

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.

Click + next to each question to see the correct answer

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: False. If you accept a credit limit increase, you do not hurt your credit score and do not take on any extra obligations. If you do not increase your spending, the limit increase will improve your credit utilization ratio, thereby boosting your credit score.

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: True. There is no law preventing merchants from charging you extra for the use of your credit card. There are, however, agreements forbidding such surcharges between credit card processors and retailers. Some retailers may stick you with extra charges.

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.

Female Cutting Up Credit Card

 

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.

Your results: 

7-8 correct answers. You have a solid grasp of how credit works, and you understand the role of credit cards in the makeup of your credit score. 

5-6 correct answers. You know how credit cards work. Your tendency to believe some myths is not helpful, however. 

3-4 correct answers. Your knowledge of credit and credit cards is superficial. Understanding the concepts discussed in this quiz is essential for your financial well-being. 

1-2 correct answers. You do not understand how credit cards work and how they impact your credit score. You have hopefully improved your knowledge of credit cards through this quiz. 

Are you worried about mounting credit card debt? Contact a ClearOne Certified Debt Specialist to find out how you can best address it and get a free savings estimate.


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