When it comes to having credit cards, there’s a lot of malarkey and misinformation floating around. Peddled by well-meaning people who think they are looking out for your best interests, the lines of reality quickly get blurred. Their heart is definitely in the right place, and I’m not saying that they don’t have reason for concern. After all, the average American’s household credit card balance (for those carrying balances) is over $15,000. So clearly, there is a credit card debt issue in this country.
Still, credit cards tend to get a pretty tough rap. I would never want you to open a credit card if you’ve had credit addiction problems in the past, nor would I ever encourage you to pile up credit card debt. Frankly, consumer debt is a prison sentence and I want you to avoid it at all costs. Yet, using credit cards can be an advantageous financial pursuit when it is done properly. That’s why I’m slipping on my white jumpsuit, strapping on my proton pack, and heading out to bust these 8 common credit card myths!
Myth #1: Credit Cards are Always Bad
There is a school of thought in the personal finance world that believes credit cards are evil incarnate. For the most part, this comes from the debt reduction crowd – which I am proudly part of, BTW. This line of thinking follows the idea that nobody should use a credit card for anything, EVER. As with all absolutes, this way of thinking tends to miss some very important opportunities.
Again, let me state that we are totally against accruing debt. If you ever want to build real wealth and experience the financial freedom that comes with it, you need to eliminate your debt. Let me also say that if you’ve had a credit addiction problem in the past, credit cards are probably something that you want to steer far, far away from.
Yet, credit cards themselves are not inherently evil. Of course, you can certainly get burned by them if you don’t use them responsibly. On the other hand, we have used credit cards and the rewards that come with them to redeem thousands of dollars in travel over the last few years. We have been able to see much of the world that we wouldn’t have been able to afford if it wasn’t for credit card rewards. Obviously, if you are spending more than you should to earn the rewards or if you are paying interest, credit card rewards aren’t saving you any money. Thus, the key is spend only what you normally would spend and pay it off with cash immediately. Myth #1 – BUSTED!
Myth #2: I Wont’ Get My Points if I Pay Off My Card Early
There is a myth floating around that paying off your balance prior to it accruing interest will cause you to lose the points that you should have earned through your spending. This myth needs to die a quick, gruesome death because it is simply not true. So, let’s put this ugly myth on the guillotine and let its head plummet into the basket below.
We use several credit cards and have for years. We pay them off several times a month. Never once have we ever lost any rewards points for paying the balance off early. In fact, if you are going to pay the credit card points game, this is the only way you should do it. If not, you are costing yourself more money in the end. Let me repeat: Pay off your cards every month. If you can’t, you are spending too much. Stop using the cards and cut them up before you get in too deep. (Annnd, cue the head plop sound effect now.)
Myth #3: I Don’t Need a Credit Card
So, this is one of those ideas that may or may not be true. The typical argument is that you don’t need a credit card because you can use a debit card to pay for items instead. You can even use your debit card for security deposits or to place items on hold, like hotel rooms. Any money you spend on the card comes directly out of your checking account, so you never have to worry about going into debt. If you don’t have enough money to cover the funds, you can’t use the debit card to make the purchase.
While all of this may be true, having a credit card can sure be a nice convenience. No, you may not necessarily need a credit card. However, there are a couple of issues that I have with the debit card substitution. Minor accounting mistakes could mean major fees. Accidentally forgetting to account for one outstanding check could mean a stiff overdraft fee. Furthermore, while using your debit card to place items on hold is logical in theory, it may not be the best option for you in practice as it could negatively affect your available cash flow. By using your debit card to book a hotel room, you are basically putting a hold on set amount of cash in your account. The hotel may place hundreds of dollars on hold that you can’t get to. Obviously, not everybody can afford to do this.
With a credit card, holds on your cash don’t happen. Your available credit may be diminished, but the actual charge is not placed until you use the item. Yes, you may not need a credit card, but it can sure help your cash flow to have one.
Myth #4: Using Credit isn’t Safe
If you are worried about whether or not it is safer to use a credit or debit card, you definitely want to stick with the credit card. According to the Federal Trade Commission, your maximum out-of-pocket loss is just $50 for fraudulent charges on your credit card. If you report the card stolen or missing prior to any fraudulent purchases, your are liable for nothing.
The same can not be said of debit cards. Like with credit cards, you are not liable for any fraudulent charges to your debit card if you report it missing or stolen prior to any purchases. You are responsible for up to $50 in purchases if you report it missing within 2 business days. However, you are responsible for up to $500 if you report the card missing more than 2 business days later, provided you report it less than 60 days after your statement has been sent to you. If not, you’re in for a major problem. Failing to report the card missing or stolen for more than 60 days after you receive your statement means that you are liable for every penny fraudulently taken from your account. You are also liable for any money taken out of other accounts that are linked to your debit card.
So, yeah. Credit cards have far more legal protection against fraud than debit cards do, and it’s not even close. Consider this myth BUSTED! KEE-YI! *Judo Chop*
Myth #5: Too Many Credit Cards Hurts Your Credit Score
This nasty rumor is almost certainly untrue for your situation. The number of cards you have open does not in itself hurt your credit score. On the other hand, if you are carrying large balances on each of them, it certainly could.
In reality, opening up a new credit card could actually help your credit score. About 30% of your credit score is composed of something called “credit utilization.” Basically, credit utilization tracks the amount of your available credit that you are currently using. So, if you have $10,000 in available credit and you have a $2,000 outstanding balance, you are using 20% of the credit that is available to you. If you open up an additional credit card with a limit of $10,000 and don’t carry a balance, your credit utilization drops to 10% (and your credit score theoretically increases).
Need more proof? We carry multiple credit cards and we change them out fairly regularly. Our credit scores range from over 750 to 810. BAM! We just busted up that chifferobe like it ain’t nobody’s business!
Myth #6: I Won’t Be Able to Get a Mortgage
One of the main ingredients for mortgage eligibility is your credit score. Remember, a credit score is essentially a measurement of how well you handle your debt. Part of your credit score is based on your payment history and still another part is based on the length of your credit history. Thus, if you want to secure a loan at a good rate, you have to show that you have a history of using credit and paying back your lenders.
In essence, a credit card can help you get a mortgage by helping you to establish a credit history. So yes, if you are using too much of your available credit or you have too high of limits set on your cards, you may have a little trouble. Otherwise, having a credit card and getting a mortgage should be no big deal. How do you like that noise Myth #6?
(Related → How to Pay Your Mortgage with a Credit Card)
I’ve heard this myth more times than I could count. Although your income may limit the total amount of credit available to you, it should have no effect on whether or not you can get a single credit card. If you can show any income at all, most credit card issuers are going to be willing to extend at least some credit to you. All you have to do is ask.
Of course, opening a credit card on a low-income may or may not be a good idea. It really depends upon your personal circumstances. If you are young and struggling, getting a credit card could be a very bad decision. If your income is low because you are retired, getting a credit card to redeem rewards points could be a good way to get free stuff – provided you have the cash saved up to pay it off. Either way, make sure that your financial house is in order before you seek out new lines of credit.
Myth #8: I Can’t Get a Credit Card Because My Credit Score is Below 720
Although you may not be eligible for the best credit card rates or the best rewards cards, you should still be eligible to obtain some type of credit card. In fact, if you are a student or somebody looking to increase your credit score, it may be a good way to start building your credit. There are dozens upon dozens of credit cards for people with bad credit. Again, you aren’t going to be able to take advantage of some of the best deals, but you there are plenty of credit card issuers who will gladly accept your business. Just remember, you need to pay your balances off every month or you are not doing yourself any favors. If you have had credit addiction issues in the past, your probably best just to stay away.
(Related → Free Credit Card Rewards Advice)
BOOM! I love myth busting! I feel so cleansed afterwards. How about you? Are there any credit card myths that you want to bust? Let us hear your thoughts in the comments below!