A Lack of Knowledge Can Be Dangerous, Too

Our blog posting of August 1, 2018 (“A Little Knowledge Can Be Dangerous) noted how Americans tend to overestimate their personal finance knowledge yet also fail to score well on financial literacy tests.  The following is an example of a common fallacy among Americans that results in interest expenses that can typically be avoided.

In a study conducted by CreditCards.com, it was found that one in five credit card users have carried a balance based on the mistaken belief that doing so will improve their credit score. Twenty eight percent of millennials with a credit card have made this mistake as have 25% of Generation X and 16% of those aged 54 and older.

Carrying a balance is not one of the factors that is considered in the calculation of a credit score.  Besides incurring interest charges (at very high rates), carrying a balance may actually reduce a credit score. This would happen if the balance pushes the card holder’s credit utilization percentage too high.  Paying credit card bills on time is far more important as this practice does have a positive impact on credit scores and avoids the late charges that are assessed on delinquent payments.