Credit cards can expand the buying power of a responsible user in the know, but those who aren't careful can quickly have their credit rating crippled and rack up huge debts. Read up on some of these common, but dangerous myths about credit cards to prepare yourself for the world of plastic.
1. Myth: Transferring the balance of one credit card to another is an effective way to manage debt
In theory, moving your debt to a credit card with a lower interest rate will save you money, but in the end, having multiple credit cards can harm your credit score. Part of the formula that credit rating bureaus use to factor your credit score is a ratio of your credit line to your credit balance. Having more debt might mean a lower score.
Plus, the bigger the balance, the faster interest will accrue. For example, 20% interest on $4000 is $800, but 10% of $9000 is still $900.
2. Myth: Cash Advance is about the same as using a debit card at an ATM
Cash Advances may seem like a quick fix when your hard up, but that $60 you pull out of the machine tonight might cost you much more by next month. Cash advances often have hidden fees and increased interest that make them hard to pay off unless you take care of them right away.
3. Myth: Paying the minimum each month is okay to get you by
True, if you pay off the minimum amount due each month the credit card companies won't sick their hounds on you, but that debt will take years and years to go away. And what's worse, you'll end up paying much more. Paying off a $5000 purchase over 8 years with an 19% interest rate racks up a hefty $4311 in interest. That means your paying almost twice as much!
4. Myth: Rebuilding your credit is simple
Unlike blowing off an assignment in high school, those red check marks on your credit report won't go away quite so easily. Defaulting on a loan, declaring bankruptcy or consistently being late on payments can cause irreparable damage to your credit rating. True, through some diligence and a lot of letters and phone calls you can clean up your credit, but its far, far easier to keep track of your spending in the first place.
5. Myth: If your card is stolen, you won't have to pay
A lot of Americans like to feel that they'll never have to pay for something unjust done to them. Not true. While many credit card companies offer some kind of fraud protection, you still have to exercise some common sense. Just like an insurance company won't reimburse you if you leave your keys on the front seat of your car, your credit card company will hold you liable if you leave your card sitting out in the open.
6. Myth: It's worth it in savings to open a credit card at a retailer
It always seems like a sweet deal: sign up for a credit card and get 10% off of everything at your favorite store. In theory, this will work out since you shop at that store all the time anyway. But in reality, most people use that discount as justification to buy 30% more than they usually do.
7. Myth: You can sign up for free stuff, then never use the card
Credit card companies like to prey upon impetuous or frugal college students by offering free food or t-shirts or novelty items for filling out a credit card application. The drawbacks are two-fold: an onslaught of junk mail and an activated credit card (probably with crumby rates) burning a hole in your wallet from that point on.
8. Myth: All is lost after your first mistake
Credit card companies are bloodsucking gougers, but that doesn't mean they can't occasionally be swayed. If you show that you are responsible, they might forgive one mistake a year. If you know a payment is going to be late because of slow postal service or you lost the bill, call them and let them know. If you've been a good customer up until that point and you are polite, you might be able to keep your credit rating pristine.
9. Myth: By using cash, you are missing out on hundreds of dollars worth of rewards
The truth is, those rewards take eons to redeem, and most of the time, they are just perks, rather than lucrative ventures. For example, you might get 3 points to the dollar spent and save up 25,000 points to get a $5 Dunkin Donuts gift card. You shouldn't use the rewards as a rationale to spend money, rather, consider it a complimentary gift for being responsible for so long.
10. Myth: Canceling unused credit cards is safe and smart
True, getting rid of cards you never use removes the risk of the card being lost or stolen, but it also reduces your total credit line, thus possibly harming your credit rating. For example, if you have $5,000 spread over 4 cards each with a credit line of $10,000 you are doing okay with about a 12.5% balance to credit line ratio. Eliminate two of those cards, and you double that figure, putting you closer to the edge of bad credit.
1. Myth: Transferring the balance of one credit card to another is an effective way to manage debt
In theory, moving your debt to a credit card with a lower interest rate will save you money, but in the end, having multiple credit cards can harm your credit score. Part of the formula that credit rating bureaus use to factor your credit score is a ratio of your credit line to your credit balance. Having more debt might mean a lower score.
Plus, the bigger the balance, the faster interest will accrue. For example, 20% interest on $4000 is $800, but 10% of $9000 is still $900.
2. Myth: Cash Advance is about the same as using a debit card at an ATM
Cash Advances may seem like a quick fix when your hard up, but that $60 you pull out of the machine tonight might cost you much more by next month. Cash advances often have hidden fees and increased interest that make them hard to pay off unless you take care of them right away.
3. Myth: Paying the minimum each month is okay to get you by
True, if you pay off the minimum amount due each month the credit card companies won't sick their hounds on you, but that debt will take years and years to go away. And what's worse, you'll end up paying much more. Paying off a $5000 purchase over 8 years with an 19% interest rate racks up a hefty $4311 in interest. That means your paying almost twice as much!
4. Myth: Rebuilding your credit is simple
Unlike blowing off an assignment in high school, those red check marks on your credit report won't go away quite so easily. Defaulting on a loan, declaring bankruptcy or consistently being late on payments can cause irreparable damage to your credit rating. True, through some diligence and a lot of letters and phone calls you can clean up your credit, but its far, far easier to keep track of your spending in the first place.
5. Myth: If your card is stolen, you won't have to pay
A lot of Americans like to feel that they'll never have to pay for something unjust done to them. Not true. While many credit card companies offer some kind of fraud protection, you still have to exercise some common sense. Just like an insurance company won't reimburse you if you leave your keys on the front seat of your car, your credit card company will hold you liable if you leave your card sitting out in the open.
6. Myth: It's worth it in savings to open a credit card at a retailer
It always seems like a sweet deal: sign up for a credit card and get 10% off of everything at your favorite store. In theory, this will work out since you shop at that store all the time anyway. But in reality, most people use that discount as justification to buy 30% more than they usually do.
7. Myth: You can sign up for free stuff, then never use the card
Credit card companies like to prey upon impetuous or frugal college students by offering free food or t-shirts or novelty items for filling out a credit card application. The drawbacks are two-fold: an onslaught of junk mail and an activated credit card (probably with crumby rates) burning a hole in your wallet from that point on.
8. Myth: All is lost after your first mistake
Credit card companies are bloodsucking gougers, but that doesn't mean they can't occasionally be swayed. If you show that you are responsible, they might forgive one mistake a year. If you know a payment is going to be late because of slow postal service or you lost the bill, call them and let them know. If you've been a good customer up until that point and you are polite, you might be able to keep your credit rating pristine.
9. Myth: By using cash, you are missing out on hundreds of dollars worth of rewards
The truth is, those rewards take eons to redeem, and most of the time, they are just perks, rather than lucrative ventures. For example, you might get 3 points to the dollar spent and save up 25,000 points to get a $5 Dunkin Donuts gift card. You shouldn't use the rewards as a rationale to spend money, rather, consider it a complimentary gift for being responsible for so long.
10. Myth: Canceling unused credit cards is safe and smart
True, getting rid of cards you never use removes the risk of the card being lost or stolen, but it also reduces your total credit line, thus possibly harming your credit rating. For example, if you have $5,000 spread over 4 cards each with a credit line of $10,000 you are doing okay with about a 12.5% balance to credit line ratio. Eliminate two of those cards, and you double that figure, putting you closer to the edge of bad credit.