Credit Card Myths Debunked

(Image by 401kcalculator.org, via Flickr.com )

If you’ve followed my writing for any period of time, thank you. And, you probably know that every once in a while I like to drop on a dose of credit myth busting. This week, I’ve collected a new round of myths specific to credit cards and this piece is to debunk them. Let’s take a look.

Myth #1 – You have to have credit card debt in order to have a good credit score

I certainly know where this one comes from, our good friend Dave Ramsey. Thankfully he’s 100% wrong when he suggests that credit scores are an incentive to get into debt and that you need credit card debt to have a good score. The reality is that you don’t need a penny of debt in order to earn and maintain elite level credit scores. In fact, credit scoring systems reward consumers who have little or no credit card debt.

Myth #2 – Closing a credit card causes you to lose the benefits of the card’s age

I’m not sure where this one came from but it’s almost as prevalent as the credit scores are used by employers myth. There is a perfectly valid reason to not close credit card accounts, which is that it might lower your scores by the unintended increase in your overall credit card utilization percentage. Utilization is the relationship between your card balances and credit limits, expressed as a percentage.

Closing credit card accounts does not mean that credit scoring systems are all of a sudden going to ignore the age of the account. A 20-year old credit card is still a 20-year old credit card, whether it’s open or closed. As long as it’s on your credit reports, it’s going to be considered in your credit score.

Myth #3 – A closed credit card stops aging when it’s closed

I heard this one for the first time a few weeks before I wrote this blog. And, it’s a nice dovetail off of Myth #2. Closing a credit card account does not stunt the aging process of the card. Even when closed, the account continues to age.

The measurement of an account’s age is based on the amount of time between the “Date Opened” of the account and the then current date. So, if you have a card opened in March 2002, it’s 10 years old as of March 2012. Whether it’s open or closed is meaningless to that measurement. In March of 2022 that same account will have aged another 10 years, even as a closed account.

The only caveat to this one is that eventually the account will be purged from your credit reports because of inactivity. And while there is nothing in the Fair Credit Reporting Act that mandates the removal of a good account (an account that is not derogatory), the credit bureaus can certainly remove it based on their own internal policies. At this point it looks like after 10 years the inactive account will be removed, but that can certainly change.

Myth #4 – Small business credit cards can’t show up on my personal credit reports

Careful, this is wrong. I believe this one comes from the fact that most small business credit cards don’t show up on personal credit reports while they’re in good standing. But, small business credit cards can certainly show up on your personal credit reports.

The cardholder often personally guarantees small business credit cards. This means the card is actually a personal credit card with a company name on the front, rather than a strict business card where the line of credit has been issued to the company. Small business card issuers can certainly choose to report personally guaranteed credit cards on your Equifax, Experian and TransUnion credit reports.

The current practice, however, is that most of these cards do not show up on your personal credit report unless you default on the account. Cards that have gone into default are frequently reported to the consumer credit bureaus. And, collection accounts resulting from defaulted small business credit cards will also show up on your personal credit reports.

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