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Credit card debt — fact vs. myth

Credit cards are powerful tool that can provide financial flexibility and security. But, like any powerful tool, it needs to be handled wisely. Managing credit card debt, first and foremost, comes down to a few basic dos and don’ts. Unfortunately, too many of us learn the ins and outs of credit card debt the hard way. As of July 2022, U.S. credit unions held over half a trillion dollars in consumer debt. Let’s put some common credit myths to the test and examine how you can overcome credit card debt when it’s getting a little too hot in the kitchen.

What is debt?

First, the basics. What is debt? Put simply, debt is money you owe. In stricter terms, debt is money you borrow, typically alongside an agreement to repay it by a specified due date with interest. Debt comes in a few flavors:

  • Secured debt: With secured debt, borrowers put up collateral that the lender could collect in the case of non-payment. Typically, collateral can be valuable assets like vehicles, equipment or real estate properties.
  • Unsecured debt: This form of debt doesn’t use collateral. Instead, lenders only assess your creditworthiness by looking at financial information like your income or credit score before deciding to lend you money and on what terms.
  • Revolving debt: Revolving debt allows you to repeatedly borrow money up to a certain limit. Credit card debt is the most common form of revolving debt.

Handling credit card debt – just the facts

When it comes to things like credit cards or how to pay off credit card debt, separating fact from fiction is the first step in avoiding the costly mistakes that come with learning the hard way. Let’s look at how credit card debt really works and debunk some common credit myths.

Myth #1: Debt consolidation hurts your credit score

Debt consolidation is a refinancing strategy commonly used to pay off credit card debt. During most debt consolidations, you’re essentially taking out one loan to pay off multiple, high-interest debts. This lets you roll all your credit card debts into a single set of payments — and at a potentially lower interest rate.

While there is a kernel of truth to this common credit myth, credit consolidation itself may not hurt your credit score. Before lending you the money, your creditor is likely to make a hard inquiry on your credit score. This lowers it slightly, but hard inquiries are temporary and only affect your credit score for one year.

Myth #2: Closing old or unused credit card accounts boosts your credit score

Truthfully, closing old or little-used accounts is likely of little help to your credit score — and may, in fact, lower it. A component of your credit score is something called the “credit utilization ratio,” which measures how much of your available credit you use. When it comes to credit scores, lower credit utilization is better.

When closing an unused credit card account, you’re reducing your total credit available without changing your usage — equating to higher credit utilization and possibly harming your credit health. Learning how to pay off credit card debt with intelligent repayment strategies betters your chances of improving your credit than snipping up old and forgotten-about credit cards.

Myth #3: Nearing your credit limit is harmless

Another widely believed credit myth is that approaching your credit limit has no effect on your credit score. For the same reason canceling unused cards won’t directly improve your credit score, approaching your limit increases your credit utilization ratio. A common rule of thumb is to try keeping your credit utilization under 30%.

This is where a budgeting tool might come in handy. Expense-tracking apps can automatically record your spending, so you don’t forget to add that last minute-grocery trip or well-deserved takeout. The Chase Mobile® app comes with a built-in Budget Planner tool with checking account and eligible credit card that connects directly to your account, recording your transactions and providing pacing alerts that tell you how much you have left to spend to stay under budget. Using whatever tools work best for you to keep tabs on your spending can help prevent your credit utilization from creeping up and possibly impacting your credit score.

Myth #4: Carrying a credit balance improves your credit score

Your credit card balance is the sum of all the debt you’ve accrued on your credit card account. When leaving a portion of it unpaid at the end of your billing cycle, you’re “carrying it over” to the next cycle.

A common credit myth is that carrying a credit card balance improves your credit score. The truth is, carrying a balance can introduce interest charges atop your remaining balance, increasing debt and potentially making it harder to make timely payments that do improve your credit score. It also risks increasing your credit utilization.

Myth #5: Checking your own credit lowers your credit score

One of the most common credit myths might be that checking your credit hurts your credit score. While hard inquiries on your credit temporarily lower your credit score, accessing your own credit files will not impact your score. In fact, the myth itself may damage your credit if it prevents you from developing good financial hygiene like regularly monitoring your credit report.

The Chase Mobile® app has a built-in credit monitoring tool, Chase Credit Journey®, that customers can use to quickly check their score and learn the credit management skills that can improve their credit.

Myth #6: Opening new credit cards hurts your credit

You may have heard that opening new credit cards lowers your credit score. As with many myths and misconceptions, the truth lies somewhere in the middle; the hard inquiry that comes with applying for a new credit card may reduce your credit score for some time. On the other hand, filling a proverbial shopping cart with new credit cards in pursuit of tempting sign-up bonuses and other rewards can be detrimental to your credit.

In summary

Misinformation goes hand in hand with credit card debt. Myths, like the notion that checking your own credit lowers your score or that carrying a credit balance improves it, can introduce costly detours on the way to good credit. Staying well-informed and empowering yourself with available tools to monitor your credit can help you separate fact from fiction when it comes to credit card debt.

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