3 Credit Myths That Could Cost You Money Next Year as Interest Rates Rise

Credit scores are an important factor in your financial life. In general, the higher your credit score, the better your chances of getting a loan.

Many Americans make common mistakes with credit that put their future financial wellbeing at risk. With interest rates rising at the steepest annual pace ever, there is even more at stake in the year ahead.

There are a lot of myths out there about credit cards and credit scores. Here are a few of the most common ones and how to avoid them.

Myth #1: Carrying a balance on your credit card will help your credit score.

Fact: Carrying a balance on your credit card does not help your credit score. In fact, it can actually hurt your score if you carry a high balance.

Myth #2: Closing a credit card will improve your credit score.

Fact: Closing a credit card will not improve your credit score. In fact, it can actually hurt your score if you close an account that has a good history.

Myth #3: You should never use your credit card.

Fact: You should use your credit card, but you should use it responsibly. That means paying off your balance in full each month and not using more than 30% of your credit limit.

According to a recent report by Capital One, nearly 70% of Americans mistakenly believe that having too low of a credit score will prevent them from qualifying for any type of credit card. This is a common misconception, as there are many credit cards available for people with all types of credit scores.

According to Ted Rossman, senior industry analyst at Bankrate and CreditCards.com, choosing the right type of card can make a difference. For example, he said, getting a secured credit card or piggy-backing on a parent's card as an authorized user are good places to start.

According to a recent report, one in five young adults have debt in collections. This means that 63% of Americans are living paycheck to paycheck, which can lead to some risky behaviors. If you're looking to improve your credit score, be sure to avoid these pitfalls.

If you don't have a proven payment history, Rossman advised considering a secured card that requires a cash deposit that serves as the credit line. Otherwise, you may need a card that requires a co-signer. In that case, the parent or co-signer would be responsible if the account isn't in good standing.

According to a Capital One survey of more than 3,500 Americans in July 2022, nearly as many – 68% – incorrectly believe that paying your utility bills on time can improve your credit score.

Most utility companies do not report payment histories to credit bureaus. Even if they did, not all credit scoring companies would consider that type of bill payment information.

If you're trying to raise your credit score, paying your bills on time will only help if you're enrolled in a program like Experian Boost, Rossman said. This program will take into account your on-time payments for utilities, phones, and cable TV when calculating your credit history.

One of the most common credit card misconceptions is that carrying a balance month to month will improve your credit score. However, this is not the case – in fact, it can actually have the opposite effect. If you're carrying a balance on your credit card, it's important to make sure you're making your payments on time and in full each month. Otherwise, you could end up damaging your credit score instead of improving it.

According to Capital One, 37% of borrowers are under the mistaken belief that leaving a balance on their credit card is better for their credit score than paying off the balance in full each month. A separate study conducted by NerdWallet found that as many as 46% of Americans make this same mistake.

The most expensive misconception is that you have to carry a balance on your credit card to improve your credit score. In fact, any amount of revolving debt costs you in interest charges. Those typically are not calculated based on how much debt you roll over to the next statement period, but rather on your daily average balance.

If you're not able to pay your bill in full, make sure to at least pay the minimum amount due. According to Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, paying less than the minimum is "the same as not paying it at all."

"A delinquency is a negative mark on your credit report," Raneri explained. "It can also lower your credit score within 15 to 30 days."

Credit experts typically recommend that borrowers keep their revolving debt below 30% of their available credit to minimize the impact that high balances can have on their credit score.

Despite this, nearly half of credit card holders carry credit card debt from month to month, according to a Bankrate report. This means that the interest charges on those balances are getting more expensive.

Credit card rates have reached an all-time high of 19% on average, after rising at the steepest annual pace ever in line with Federal Reserve interest rate hikes to combat inflation.

According to a separate analysis by WalletHub, the Fed's rate increases will result in credit card users paying around $22.9 billion more in 2022 than they would have otherwise.