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Chelsea: Hi, I'm Chelsea

Lauren: And I'm Lauren

Chelsea: And we are

Together: The Financial Diet

Chelsea: And today we're going to be talking about something that I think is one of the scariest parts of personal finance, and I don't just say that as someone who ruined her own credit with a visa at 18, and that's credit cards! But when it comes to money like with most other things in life, knowledge is power and really understanding credit cards can make them go from something that's intimidating and scary to something you can actually use to your advantage. So we spoke to a personal finance professional to find out some of the biggest myths about credit cards and the truth behind them, so that we can all understand them and really get over our credit card fear. 

Lauren: So myth number 1 is that making the minimum payment is enough. Now this is untrue because what can happen is that your left with a pretty sizeable balance once that very low, introductory interest rate expires. In short, keeping a running balance can mean that interest payments add up very quickly.

Chelsea: And it's also good to remember that the higher percentage of your available credit that you're using month to month the worse your gonna look. Myth number 2, opening a new credit card will hurt your credit score for a long time. So the short answer is that opening a new credit card does not hurt your credit score in most cases, but the truth is that it can impact your credit score in four important ways. Now the first particular potential impact is that when you apply for a new credit card the lender performs what is called a hard inquiry onto your credit score, which is generally what happens when you're applying for a line of credit.

Now too many of these hard inquiries in a certain period of time can negatively impact your credit score because it could mean that a) you're really shopping around for a loan because you're not getting approved for one or b) you're trying to borrow a lot of money at once. So a positive impact that credit cards can actually on your score is having different types of accounts with your credit cards because this shows lenders that you're experienced at managing different types of credit. Now the third impact, and this is another good one, is credit utilization and that basically means the gap between what you can do with your credit card, the maximum, and what you are doing.

And a good way that opening another credit card might help you with this is that let's say you're already using a certain percentage of one card, it's not too high, but it's somewhere in the middle and you open up another one so now you're using even less on that first card as well as not a lot on the second one, that means you're overall gap between what you're using and what you could use is even better. Now the last impact that your cards can have is in length of time that you've had them. Now this one is not so much about, you know, the number of cards you have or whatever, but it is good to keep in mind that having cards open for a longer time and using them responsibly is good for lenders because it shows that you can manage your credit longer term. 

Lauren: Now the third myth is that you need to carry a balance in order to improve your credit score. Now this is totally untrue, of course, and what's important is that you actually use your card not that you've retained a balance month to month. So building credit history means that you can manage you debt responsibly over time, not that you can simply keep a balance month to month and accruing interest.

Chelsea: So myth number 4 is that interest rates are fixed. Now that the truth is that even though it used to be very common to find fixed interest rate cards, now it's relatively rare to find cards that aren't at least somewhat variable in interest. Now this is largely due to the 2010 CARD Act, which stands for credit card accountability, responsibility and disclosure, and you can read more about that act in the description. 

Lauren: Myth number 5 is that it's okay to max out your credit cards. What?! No way! That's absolutely untrue! That is of course not the case, you don't need to max out your credit card

Chelsea: *Making emergency noises repeatedly* Do not max out your credit card.

Lauren: All that's going to do is accrue dizzying interest payments and also show the lenders that you have a very high credit utilization, which as we discussed earlier, is not good. Generally speaking you should keep your credit utilization under 30% to avoid harming your credit score. 

Chelsea: So our last myth is a really big one and one even I believed until we were researching this video

Lauren: Same

Chelsea: Which is that you only have one credit score. False! You have many credit scores and like Ben & Jerry's they come in many different flavors. Currently there are 2 main models to use to calculate credit scores and the 3 major credit bureaus use these 2 main major models, which are FICO and Vantage Score. And this means that you'll have both the Vantage score and FICO from each of these 3 main major bureaus and lenders choose which model they'd like to use. And within each scoring model there are multiple variations. 

Lauren: So we hope that uncovering the truth behind those 6 credit card myths will help you feel like they're not that scary because in reality they're not and will help you really see them as a tool to your financial advantage.

Chelsea: So thank you as always for watching and don't forget to hit the subscribe button and to go to thefinancialdiet.com for more

Together: Bye!