What Credit Card Companies Don’t Tell You

What's up guys? It's Graham here. So it's that time again, and that's time for another credit card video. Now even though most of us by now know how to properly use a credit card, we understand the concepts. We know to pay off our bill in full every single month. We know how to get the three points. We also know how to smash that like button if you haven't already. There are still several very common mistakes that I see happening; they get brought up all the time. What's even worse is that several of these mistakes can end up costing you a lot of money, and they're so easily avoidable.

So let's go through the five most common credit card myths out there, and then we'll debunk them kind of like the credit card version of MythBusters—just the really cool goatee. So let's go back to the very beginning. Here is a comment that I end up getting a lot: "Why do some people say leave five dollars or ten dollars on your credit card after payments? That doesn't make sense to me, but I'd like to know why people do this."

Okay, so there's a myth that got started somewhere, at some time, probably by the credit card companies, that suggests that if you leave a small balance on your credit card and pay a little bit of interest, that that will help improve your credit score. This is actually something that I have been hearing for years, and some people swear by leaving like 20 or 30 dollars on their credit card and paying a little bit of interest as some sort of life hack to getting the perfect credit score.

Well, you know what? Fortunately for all of us watching, that is a myth that is untrue. Leaving any sort of balance on the credit card is going to improve your credit score. If anything, that just costs you money because now you're paying interest on your unpaid balance. Paying any sort of interest on a credit card does not increase your score any further than if you just paid off your bill in full on time.

Now instead, here's what really improves your credit score, and it's really important you pay attention to this because I'm going to be referring to this throughout the video. 35% of your credit score consists of your payment history. This just means you pay your credit card bill by the time it's due without having any late payments. And when it comes to this, paying off your bill entirely in full or just making the monthly payment and then keeping a balance will affect your score exactly the same in this category as long as you pay it off in time.

Now secondly, 30% of your credit score is calculated based on your credit utilization. This just means the amount of credit you have available to you versus the amount of credit that you actually use. Now ideally, the lower your credit card balances at the end of each billing cycle, the higher your score will be. The third is that 15% of your credit score is calculated by the length of your credit history. So the longer you've had credit available to you, the higher your score is generally going to be.

The fourth is that 10% of your credit score is calculated by what's called new credit. So if you end up taking out new lines of credit, generally this will have a small impact on what your credit score will be. And fifth, the remaining 10% of your credit score is calculated by the number of credit lines and the mix of credit lines you have available to you. It helps to show having multiple credit cards, auto loans, lease payments, mortgage payments, or anything else that you can add into the mix; that just shows you're responsible for paying off different lines of credit.

So as you can see here, between the factors that actually do increase your credit score, how much you pay in interest is not one of them. So don't ever leave any sort of balance on your credit card just to pay some interest to improve your credit score because that won't work. That instead is just going to cost you money. It's more important that instead, you just make sure to pay your bill off every single month on time.

So next, let's get to the second credit card myth. This is something that has come up a lot on my channel; it's extremely common. So here is the comment: "Is it true that if you have too much credit available, it makes it harder for you to get loans for a car, house, etc.?"

Now this is actually a really interesting one because this had some truth to it about 30 years ago. So gather round, boys and girls; let's have a credit card history lesson. Now back in the '70s and '80s, the conventional thought between mortgage lenders was that if a borrower had access to too many lines of credit, they posed a higher risk of default because they had the ability and the temptation to go and just use all of it. It was also thought that these borrowers could get themselves in such deep debt that eventually they would just fall behind on their payments, they would default on them, and then the lenders would have to go and seek legal action to get their money back.

So the solution to this back then, as a borrower, was to close any unused lines of credit to reduce the amount of credit you have available to you to be in a better position to then find a house or a car. However, in the late 1980s, the FICO scoring method began analyzing the millions of credit files they had on record and that revealed that borrowers were not more likely to default on their loan if they had more credit available to them.

Also, they found that the temptation of going and spending up all the credit would not corrupt an otherwise responsible borrower who always paid on time. In fact, they actually found the opposite: that the more credit a borrower has available to them, the less likely they were not to repay those debts and the higher the credit score they should have.

Now also, in addition to that, having more credit available to you, even if you don't end up using it, lowers your utilization rate, which, like I mentioned previously, makes up 30% of your credit score. So while this may have been a concern back in the '70s and '80s, this is no longer a concern today when FICO now rewards you for long-standing on-time payments and low credit utilization by having more credit lines open.

Alright, so I guess that was a pretty fun credit card history lesson. But the credit card myths keep coming in, and here's another one that I get a ton. A lot of people are confused on this, and this goes something like this: "When should I cancel my credit cards? I have two I don't use anymore. I really don't need them anymore; I have established credit."

Now this one seems like a reasonable thought process too. If you have a credit card you don't really use anymore, it kind of makes sense just to close it; it's one less thing to worry about. However, unfortunately, doing this could end up dramatically lowering your credit score, and in most situations, this is a really bad idea that you should avoid.

And here's why: first, remember how I mentioned earlier that your credit card utilization, which is basically the amount of credit you have available to you versus the amount of credit that you use, makes up 30% of your credit score? Well, keeping your credit card open actually helps with this because it shows that you have more credit available to you, and from your normal spending, you spend a smaller percentage of what you have.

Secondly, since the length of your credit history makes up about 15% of your credit score, if you end up canceling an old card, that can lower the average age of your credit history and therefore also lower your credit score. I've seen so many people cancel old credit cards because they didn't think they needed them anymore, and then all of a sudden, their score drops by like 30 or 40 points. Don't do this; this is bad.

So if you have a credit card you haven't used in a while, just keep it that way. Keep the credit card open, put it in a drawer, forget about it, put it in a block of ice in the freezer, give it to me so I can spend money on it. I don't care what you do, as long as you just keep it open.

Alright, so now we have two credit card myths to go. This is another one I get asked a ton, especially on my credit card churning videos because this one actually has some truth to it. So this is what it is: "Doesn't your credit score tumble each time you either open or even close a bank account or credit card?"

Now, when it comes to this, first of all, closing a bank account has no impact whatsoever on your credit score, so we'll just move on from that one. And the second part of this, with some truth to it, is that yes, opening up a new credit card can have a negative impact on your credit score. However, it's not as bad as what most people tend to make it out to be.

So here is why: each time you apply for a new line of credit, lenders will perform what's called a hard inquiry, which is where they pull your credit report. At any time a lender performs a hard inquiry, for the most part, your score will be lowered by about three to five points. This is because generally, people are seen as a slightly higher risk when they're actively out there trying to seek new lines of credit. So if you're out there all day, every day, just going in like signing up for new credit cards, yes, chances are your credit score is going to drop.

However, the good news with hard inquiries is that they only affect your credit score for six months, and then after that, it has no negative impact on your score, so this is really only a temporary drop. Now, of course, in addition to the three to five point drop of a hard inquiry, applying for a new credit card does lower the age of your average account length, thereby also lowering your score a little bit.

So for example, if you've only had one credit card for ten years and then today you apply for a second credit card, all of a sudden the average age of your credit history length goes from ten years to five years because you applied for a new credit card today, and your oldest credit card was ten years old. Remember that when it comes to this, the average age of your credit history affects your score by about 15%.

However, though, the good news with opening up new lines of credit is that it can actually help your score more than it hurts in two areas. The first one is that opening up a credit card improves your credit utilization, which remember, like I mentioned earlier, is 30% of your credit score. So in this sense, having more credit available to you can actually help you more than it hurts to open up a new credit card.

And secondly, adding another credit line to the mix can actually help the types of credit you have available to you, which, like I mentioned, makes up 10% of your score. So from my experience overall, opening up a new line of credit or new credit card has such a minimal impact on your score, and in some situations, I've actually opened up new lines of credit and my score somehow ends up going up.

The only time I would not open up a new line of credit or be sure not to do anything drastic is if you're planning to get a mortgage in the next six to eight months, in which case I wouldn't risk doing anything to your credit that could impact the loan that you get. But besides that, for the most part, it's pretty minimal, if any impact at all, by opening up a new credit card.

And now last but not least, this is a credit card myth that I have heard a lot that actually has some truth to it, and this is something that I have learned the hard way. This is what it is: "I just wanted to ask if you consistently use each credit card, perhaps rotating them. If not, will they close your card account?"

Now this myth is not so much of a myth because it's true. The thing is that credit card companies only have the ability to extend lines of credit to a limited amount of people. So when they extend credit to someone who never uses them, ever, the credit card companies don't make any money. So instead, what they end up doing is eventually, if that person is not generating them anything, they end up canceling on that person to give that credit to someone else who will actually use it and make the credit card companies money.

Now this actually happened to me with one of my oldest credit cards. I completely forgot about it; I hadn't used it probably two and a half or three years. Then randomly one day, I went to check my credit reports and noticed that that account had been canceled. As soon as I saw this, I went and called the credit card company, and of course, they canceled my credit card due to inactivity. Basically, my credit card expired, and they just chose not to renew that credit card and send me another one.

Now thankfully, I had so many other credit cards that it didn't really make any difference to my score at all, but still, it was like that credit card and I had some history together, and they just had to go and end it like that without even a text, without even a phone call. That was bad. So basically, I just chalk this up to a learning experience, you know, lesson learned, and now I make an effort to at least use my old cards at least once every six months.

I'll basically just go to the gas station, put like twenty dollars on an old card, wait a few weeks, and then just pay it off in full. So when it comes to this, this myth is absolutely true, and it's very important that you make an effort to at least use your old credit cards every now and then just to show some sort of activity on them, not to give them any reason to cancel. So that way you keep them open, you keep the length of your credit history longer, and that will improve your score.

So anyway, those are the five most common credit card myths out there and how you can use that knowledge to increase your credit score, save you money, and eventually get you to smash that like button if you haven't already. So with that said, you guys, thank you so much for watching. I really appreciate it. If you made it to the very end and you haven't already subscribed, make sure to smash that subscribe button, smash that notification bell so YouTube can notify you anytime I post a video. Also, feel free to add me on Instagram. I post it pretty much daily, so if you want to be a part of it on Instagram, feel free to add me there. Thank you again for watching, and until next time!