Ric Edelman, a financial adviser who is a best-selling author and syndicated radio show host, remembers the days when everyone rushed to the bank on a Friday afternoon to cash their weekly paycheck.
“If we didn’t get there in time, we had no money to spend for the weekend,’’ Edelman said. “Can you imagine?’’
The new generation of American consumers can’t fathom such a concept. Today’s solution cuts across economic lines. Ready to purchase something? Pull out your credit card. Swipe now, ask questions later!
Credit cards are omnipresent symbols of a society that could be cash-less one day very soon. But cards come with a price — often in the form of credit card debt. Dispelling credit card myths is the first step to raising your credit score.
“The use of non-money credit cards allows people to make impulse purchases without any real sense of the physical cost that comes when using hard dollars,’’ said Joe Birkofer, a financial adviser. “It’s promoted as a convenience and a quick turnaround on the receivables, but really it continues to lead people to overconsume beyond their income levels.’’
Credit cards can be a major convenience, but only if they are utilized with discipline. Here are some credit score myths that need to be re-examined:
Myth #1: Don’t Get a Credit Card
You may hear this suggestion often: Do not get a credit card! After all, what could be a better way to avoid credit card debt? Just line up a pre-paid credit card, learn the difference between a debit card vs. credit card, and you’re good to go, right? Actually, no. That’s where discipline comes in.
Credit cards don’t come out of your pocket and swipe themselves. If you use credit cards with thoughtfulness and reason, they can become significant assets in establishing and building credit history. Debit cards do not.
Myth #2: Carrying a Credit Card Balance Helps Your Credit Score
Don’t pay the whole thing off, even if you can. That’s to your advantage, right? Not necessarily.
“The best advice is to make the payment on time and pay the whole thing off,’’ said Laura Adams, a financial adviser. “Don’t miss a payment — ever. And pay more than the minimum if you can. That will do the best service to your credit score.’’ Carrying a high credit card balance from month to month sets off alarm bells. It makes you look irresponsible to lenders.
Myth #3: Only Keep One Credit Card
Again, this might be excellent advice for anyone who lacks financial self-discipline. If you get overwhelmed or can’t keep track of your purchases, then yes, by all means, stick to one credit card that best fits your spending habits.
Otherwise, it’s probably good business to have a second credit card to use if the first is refused, for any reason. The key is keeping your credit utilization low; lenders love that. A good rule of thumb is to spend 30% or less of your credit limit.
Myth #4: You Can Go over Your Credit Limit
A common refrain is that it’s okay to overspend your credit limit. As long as you pay it back before the due date, all is forgiven. But this is not necessarily true.
If you’ve been a good customer, the credit card companies will take that into account, not declining your purchase or hitting you with over-limit fees. It also helps if you call right before a big purchase and ask for an increase in your credit limit. But every time you pass that credit limit — even for a brief time — it gives the issuer a reason to boost your interest rate. And none of these things will help improve your credit score.
Myth #5: Making the Minimum Payment Is Enough
It can be a confusing figure for inexperienced credit card users. The “minimum payment’’ might look like all that is owed each month, but there is a penalty for paying only the minimum. The interest on your credit card kicks in on the remaining balance and gets added to your bill next month.
Truthfully, it’s more useful to view the total current balance; it’s the amount that’s owed. Paying only the minimum payment very often leads to a cycle of credit card debt.
Myth #6: Don’t Make Everyday Purchases on Your Credit Card
It’s best to avoid using your credit card for food, clothing, gas and other everyday items… right? Not necessarily.
If you are organized and disciplined, using a credit card for everyday items can actually work to your advantage. Many credit cards have cash-back rewards or programs that offer mileage/points rewards based on purchasing food, clothing, and other items. At the very least, it’s a good way to rack up some rewards. But again, only if you can comfortably pay the bill and not assume more unneeded debt.
“So much of it is common sense and not putting yourself in bad positions,’’ says Annamaria Lusardi, a professor at George Washington University. “People have almost gotten immune to debt because of the conveniences (of using credit cards). They commonly think they can buy things well above their means. Ultimately, that kind of thinking catches up to you. When you get a credit card, it will be so much to your advantage if you know the responsible way to use it.’’
Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.
5 MINUTE READ
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