The results of TotallyMoney’s Financial Awareness Survey 2020 reveals that myths surrounding interest payments, credit limits and how often you need to use your card are clouding the judgement of UK consumers.
One shocking statistic shows that over half of UK adults (54%) didn’t know that paying off an outstanding balance in full each month may be good for their credit rating.
Equally concerning is that almost two fifths of people (37%) wrongly believe that by making minimum monthly repayments, interest is waived.
Surprisingly, the presence of these finance industry misconceptions and half-truths aren’t new, but their effects prolong credit confusion for consumers across the UK.
Alastair Douglas, CEO of finance experts TotallyMoney, said: “Credit myths have a habit of tripping up both new and experienced credit users.
“Second-hand advice and outdated information fan the flames of these financial fables. They cause people to miss out on credit opportunities they’re entitled to or, worse still, result in consumers being burnt by unnecessary costs because of bad credit knowledge.
“Breaking the cycle of these credit myths means putting accurate information into the hands of consumers, which takes time. At TotallyMoney, our mission is to improve the UK’s credit score. A large part of this is tackling these long-standing myths so our customers have the knowledge they need to move on up to a better financial future.”
Putting an end to financial fables
Myth 1: Credit limits are there to be used, so it’s OK to max out my card
Why people believe it: Lenders make financial assessments to set the limits. They must be happy for me to use the full credit amount, or they wouldn’t have set that limit.
The facts: Lenders watch how you spend your credit. How you use it contributes to your credit score. Maxing out cards or going close to the limit may suggest a heavy reliance on credit for everyday living, which increases the risk of racking up debts you can’t repay. Avoid this by keeping the balance on your card to under 25% of your total limit.
The findings: Only 18% of adults knew that keeping your balance below 25% of your limit may improve your credit score.
Myth 2: Interest isn’t added if I make monthly minimum repayments
Why people believe it: The banks are happy with this minimum amount, so if I pay what they ask I’ll avoid extra interest.
The facts: Interest is only waived during interest-free offers or by clearing your balance in full, every month.
The findings: Almost two fifths of people (37%) thought interest wouldn’t be added if minimum payments were made each month.
Myth 3: My credit score doesn’t influence the credit deals or offers that are available to me
Why people believe it: Score changes can be so minor that lenders won’t notice. It makes little difference. They’ll either lend to me or they won’t.
The facts: A high credit score shows lenders you’re trustworthy. The more they trust you, the more favourable the offers and products.
The findings: Shockingly, only a third of people (34%) realised that a higher credit score leads to better deals.
Myth 4: Borrowing on a credit card and debit card give me the same protections
Why people believe it: Debit cards look and work the same as credit cards, therefore they have the same protections and there’s no benefit to using one over the other.
The facts: Credit card payments are protected by Section 75. This entitles you to reimbursement for payments between £100 and £30,000 if a purchase isn’t successfully completed. Debit card payments aren’t protected by Section 75 so if something goes wrong (like a company goes bust) your money is lost.
The findings: Well over half of people (60%) had no idea they were entitled to purchase protection by using their credit card.
Myth 5: I must use my card every month
Why people believe it: Lenders want you to use your card, so if they see you’re not making purchases they’ll take it away.
The facts: It’s your card and your credit to use as fleetingly as you want. You don’t have to use it every month. Plus, remaining under 25% of your limit month after month can boost your credit score.
The findings: A huge 59% of adults wrongly believe that to keep a card you had to use it every month.
Myth 6: I should choose a card based on the APR
Why people believe it: APR relates to interest. High APR means paying more interest, which no one wants. Plus, APR is always shown in credit adverts so it must be important.
The facts: If you regularly leave a balance on your credit card and it doesn’t have an interest-free offer on it, then a high APR means you’ll pay more interest on whatever’s left over. But, credit best practice means repaying your balance in full, every month so you never incur interest. If you do this, how high the APR is doesn’t matter. Instead, look for the credit card benefits that suit your needs, such as a balance transfer offer or 0% interest term.
The findings: When quizzed on APR, 38% of people believed this figure was the most important thing to look at before applying for a card.
Myth 7: I’m more likely to be approved for a card from my bank than any other lender
Why people believe it: My bank already knows me and my financial position, so they’re more likely to approve my credit application.
The facts: Banks don’t consider this. If anything, being an existing customer could work against you because they don’t need to win you over. Shopping around is worth it. Other lenders wanting to entice you to become their customer could give you more favourable terms.