Myths About Credit Cards
Credit cards are a valuable yet often misunderstood tool. There are many myths about credit cards that can quickly plunge someone into a debt crunch. Your financial well-being needs to be rooted in knowledge.
The better you understand how credit cards work and the right way to use them, the less likely you are to fall victim to a bad company or wind up in debt. So, if you’re thinking about applying for your first credit card, or interested in improving your score, here are six common myths you might believe debunked.
#1 Balances Are Useful on Credit Cards
Some people believe carrying a balance on a credit card demonstrates they’re using the card actively, thus improving their score. This is false. Carrying a balance leads to accumulating interest, possibly facing late fees, and increasing your credit utilization. This is a metric rating agencies use in calculating your credit score.
The best way to build good credit is to spend wisely and pay off your card’s entire balance before it’s due. People who generate large balances might even have their limits lowered by the credit company despite not missing any payments. Rating agencies like to see utilization, not just balances.
#2 Credit Cards Are Free Money
Money isn’t free, period. Just because you can sign up and get approved for a credit card without paying anything does not mean the money is a handout. Credit cards are a loan and they must be paid back on time. This means credit cards should not be used to spend beyond someone’s means on frivolous purchases or expenses they wouldn’t purchase otherwise.
A good rule of thumb when using a credit card is to consider whether you would make this purchase with cash if you had it in your hand right now. If the answer is no, then save the money and protect your credit. There’s no need to build up debt on things that aren’t necessary.
#3 You Can Just Pay the Minimum Each Month
Paying your minimum while still actively using the card puts you on a trajectory to debt. As you spend more, your required minimum will increase. You’ll also generate interest that increases your total balance. Minimum payments are not the way to avoid paying interest. The best way to do that is to spend strategically and align your expenses with your budget.
Although minimum payments can be useful if you’re strapped for cash, they should not be the default method of repaying credit cards. Although they can keep your card open and in good standing, they will increase your debt and gradually lower your score over time. This is because monthly minimum payments are usually less than the accumulating interest; a trap that keeps you in debt.
#4 Credit Card Interest Is Unavoidable
Interest is not mandatory when paying a credit card. In fact, there are many people who have multiple cards in excellent standing and have never paid a dime in interest. How? Because they pay their balances in-full before they’re due. You might think that isn’t realistic, but it is if you don’t spend more than you can pay off.
The fundamental problem many people with credit card debt face is that they view the card as an extension of their income, not a reflection of it. For example, let’s say you’ve been approved for a new card with a starting limit of $1,500. Rather than viewing that as extra money you don’t have, you should only use the money to buy things that you know you can cover within a month.
Emergencies do happen, and sometimes, overspending on a card may be unavoidable. However, credit cards are not designed to function as a substitute for income.
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#5 You Can’t Check Your Credit Score Without Lowering It
While you can get a free credit report each year from the three major credit unions, you can also pull your own credit any time without lowering your score on many websites. When you check your own score in certain scenarios, this is considered a “soft inquiry” and does not lower your score.
Only use official sites like MyBankrate and CreditKarma. Your bank may also provide access to your FICO score depending on the type of card you have. Be aware that signing up for third-party reporting agencies may require you to opt-in to receive promotional emails.
#6 Cards Close When You Pay Them Off
Although you may no longer want to use a card, closing multiple accounts at once can lower your score. Canceling a card affects your credit utilization score, which other lenders will examine when you apply for one of their cards. In general, it’s best to keep a card open once it’s paid off and use them in small amounts to increase your overall score. This will demonstrate the ability to maintain long-term credit relationships.
In some instances, canceling a credit card may come with an expensive annual fee, so make sure you are fully aware of any associated costs before closing an account.
Debunking Myths About Credit Cards
If you’ve fallen victim to any one of these myths, you’re not alone. Credit card debt exceeded $1 trillion in the fall of 2019. Carrying hefty credit card balances can feel crushing, but you don’t have to tackle your debt alone.
UmbrellaDEBT Relief specializes in helping individuals just like you take stock of your financial situation and lay the path to financial freedom. By working with one of our accredited debt management professionals, you will have access to valuable financial insight. Our staff can provide you with the resources necessary to climb out of debt in the fastest and financially smart way possible. Contact UmbrellaDEBT Relief today for a free no-obligation quote.