Credit cards are the most common form of everyday credit we use, and if you’re new to the world of plastic, you might be a little daunted by the idea of managing a credit card. After all, there are so many horror stories out there of people getting themselves into mounds of debt.
Just the facts that Americans owe almost $1 BILLION in credit card debt and the average household has almost $7,000 in credit card debt are enough to make you want to toss out any credit card offers that might arrive in your mailbox.
Unfortunately, so many life events, such as buying a house or car, renting an apartment, or even getting job, rely on credit scores, that it is hard to cut credit cards out of your life completely.
Instead of foregoing the plastic altogether, I encourage people to get in the habit of using credit responsibly.
Cool. “Responsibly.” What the heck does that mean!?
If you go on public forums like Reddit, Twitter, or Facebook or talk to your family and friends, you’ll probably see/hear a huge range of attitudes towards credit cards, some of them TERRIBLE.
A couple of beliefs seem particularly wide-spread and concerning, so I thought that I’d address them here and explain why you should ignore them. Keep in mind I’m not a credit professional, but I’ve managed my own cards for years with fantastic results, and I have a weird love of researching this stuff. Where appropriate, I’ve linked other sources so you don’t have to just take my word for it.
“Carrying a balance helps your credit score.”
This one is easy to debunk by knowing how a credit score is calculated.
Over a third of your score relies on your payment history, so pay on time, every time, and you’re off to a good start.
Next up is credit utilization ratio, which makes up another 30% of the score. If you use below 20-30% of your available credit, you’ll look good to the credit bureaus, and lower is better.
I think the idea for the bad advice to carry a balance comes from the fact that credit card companies report your usage to the credit bureaus once a month. If you’ve already paid off your card by the time the report goes out, it MAY look like you’re not using your credit, but if you spread out your payments so the report shows some usage, it shows responsible use of credit.
However, there is NO BENEFIT to carrying any balance over to the next month. The next report won’t happen for a month and you’ll end up paying interest on whatever balance is still on the card.
Bottom line: find out when your bank reports to the credit bureaus and time your payoffs to happen right after that or multiple times a month if you tend to use a high percentage of your credit.
“You don’t need a credit card. Just use your debit card. It’s the same thing.”
Debit cards are tied directly to your checking account, so they pull money immediately from that account. They don’t report to the credit bureaus, and they don’t carry any real protections in case someone steals the number and racks up fraudulent charges.
Credit cards “promise” to pay for goods later. You must deliberately go in and pay your cards off every month. They report your usage to the credit bureaus, which builds your credit profile, and they generally carry protections in case of fraud. They also often include perks like points, cash back, airline miles, store discounts, etc.
So no, credit cards are not the same as debit cards. If you pull out your plastic to pay for lots of stuff in person and online, credit cards are much safer to use.
“You need to carry a balance, or the credit card company might close your account.”
This idea apparently stems from a misunderstanding about how credit card companies make money.
Sure, if you carry a balance and pay interest on it, the credit card company makes money from you.
But credit card companies make money in a TON of ways besides the interest on people’s balances. These include annual fees on some cards, perks you can pay extra to have, a variety of fees, such as those for late payments, and a percent of every transaction you make on the card.
Ever wonder why some businesses only take certain credit cards? That transaction fee is usually why. A Visa might be affordable for a small business to run, whereas an American Express card might not.
Credit card companies would certainly prefer if you paid them interest on a balance, but they’re not going to close your account just because you don’t.
They CAN close your account for several other reasons, though. Not using your card at all for a long period is one of them, so it’s a good idea to charge something, even just a meal or tank of gas, every so often. This is where I suspect the idea of carrying a balance comes from — to “prove you’re using the card”. But even a single charge that’s paid off at the end of the month should take care of that concern.
If you’re at all worried, give your bank or credit card company a call to find out what could qualify your account for closure. Better yet, read the fine print before you officially sign up for a card!
“You can use your credit cards as your emergency fund.”
Ouch. This could potentially be one of the most damaging credit card lies on this list.
First, do you know what an emergency fund is? Check out our article about E-Funds to brush up on why you need one. Yes, you.
Now, you know what ISN’T an emergency fund? A credit card.
“But, Elizabeth”, you ask, “can’t a credit card be used to pay for something in an emergency?”
But here’s the thing: credit card money isn’t free in the long term.
If you can’t pay off whatever you charge on your credit card by the end of the month, you’re going to end up paying an average of 17.57% on what’s left on it. That means if you charged $1000 of car repair, your new balance after the end of the month would be $1,175.70. The month after, $1,382.27.
Is that going to get easier to pay off if you couldn’t cover the repair in the first place?
Nope. Suddenly, you’ll be staring at months or years of payments on a one-time emergency expense. And what if something else happens before you’re done paying that off?
That’s the debt cycle.
If you think ahead and stash some cash in a proper emergency fund, you’ll be able to breathe a lot easier knowing that you can use that money and not owe a dime more than it cost originally.
Now, as we all know, sometimes stuff happens.
Maybe you’ve exhausted your E-Fund and some other disaster happens.
Maybe you’re just starting out, barely any money to your name, and life throws you a sucker punch.
If this happens to you, see if you can get a personal loan from a bank before you resort to your credit card. (Avoid payday loan places like the plague.) You’ll still pay a little interest, but it will likely be a much lower rate than your card charges.
Then, when you can, rebuild your E-Fund.
“Credit cards are only for people who can’t afford to pay cash.”
This is a weird one that I first became aware of through a viral video a few years ago in which a woman complained that her date had paid with a card.
I can kind of see how someone might think credit card usage is a bad sign if they were raised on the idea that cards were for emergencies or big purchases you couldn’t pay for on your own. To someone with this mindset, using a credit card might be a sign that someone doesn’t have the liquid cash to pay for whatever it is he/she is charging.
Hopefully most of what I’ve already said shows how this isn’t true at all. Millions of people use credit cards because they are convenient and provide several nice perks that can make life better by making flights or hotels cheaper or give a little cash back. Then there’s the whole credit-building thing.
Most of the purchases I make on my credit card are small. Groceries, meals and drinks out, online purchases, in-store purchases — all of it goes on whichever of my cards will reward me the most for that purchase.
Key point: at the end of the month, every single dollar on those cards gets paid off.
Some people may very well use credit cards to pay for things they can’t afford, but don’t make the assumption that everyone using a credit card is over-extending themselves.
“You never really stop paying on your credit cards.”
This is phrase I heard someone I know and love utter ever-so-casually.
She just figured that credit card debt was supposed to be a permanent part of her life. Forever.
I’m pretty sure my face betrayed the horror I felt when I heard that.
If you’ve read this far, you should know the spiel of why this does NOT have to be true.
If you find yourself in a situation in which you feel this way, it’s time to get serious about finding ways to pay down the debt faster. Whether it’s cutting expenses or boosting your income, there is usually SOMETHING you can do to get those bills down faster. It may suck for a little bit, but you’ll feel so much better when you don’t have that debt weighing on you.
Need some inspiration for getting out of credit card debt? There are a TON of awesome bloggers in the financial space detailing exactly how they’re going about getting themselves out of all kinds of debt. Check out the Rockstar Finance Directory of finance blogs and find your inspiration!