Credit Card Myths
October 06, 2010According to IndexCreditCards.com the average household in America has nearly $7,400 in credit card debt. What’s more disturbing is when you take away households that have zero credit card debt that figure jumps to almost $16,000! We haven’t even considered the other forms of household debt, such as student loans, car loans, and mortgages. When you consider that the average interest rate on a credit card is somewhere above 14% you start to realize just how easy it is to get over our heads in debt.
For some, using a credit card is necessary because of a personal financial crisis, such as losing a job, but for many, using a credit card is simply a way of life. For one reason or another, we’ve been convinced that using a credit card is classy, financially responsible, and fun. I am guilty of it as well. I remember when I got my first credit card. I was a freshman at college, and I was convinced that having a credit card would help me establish credit, and become financially independent. Well, here are five myths about credit cards that we should ALL be aware of:
Myth #1 You need a credit card to establish credit
Well, it is true that having a credit card will be part of your credit history, but there are many other less onerous ways to establish credit. Owning a cell phone, paying a utility bill, and having student loans are just a few examples of activities that become part of your credit history.
Myth #2 Having a credit card will help you to become financially independent
There is nothing about spending money you don’t have and getting further into credit card debt that helps you to become financially independent. The true meaning of financial independence is owing nothing, having enough income to support your lifestyle, and enough saved for future financial goals and emergencies.
Myth #3 Using a credit card is an interest free loan during the grace period
This is a common misconception. The truth is that your card company begins charging interest from the moment you make a purchase. However, if you pay off your full balance within the grace period, then the card company waives the interest charges. If you don’t make a full payment or miss a payment due date you’ll be charged interest from day 1.
Myth #4 Closing a credit card account will hurt my credit score
This is only true if you carry a balance. Let’s say for example that you have three cards with a $5,000 limit on each ($15,000 of available credit) and you have a balance of $5,000 between two of them. Your utilization rate is 33% ($5,000/$15,000). Now you close a card. Suddenly your utilization rate jumps to 50% ($5,000/$10,000). This will most likely lower your credit score. But, it you pay off all your balances and bring your utilization to 0%, then closing a card reduces your amount of available credit, which can actually be beneficial since having a large amount of available credit is the equivalent of having a large amount of debt.
Myth #5 I need a credit card to travel
Again, this is half true. Standing next to someone yesterday at the rental car agency reminded me that for some companies you are required to have a credit card to use them, but not all companies operate this way. If this is a concern for you, contact the companies in advance to find out what their policies are with respect to using debit cards to secure financial transactions.
These are just a few of the many myths that exist. See here for a list of other common credit card myths. At the end of the day, it all comes down to how well we control our spending, so don’t let the lure of easy money cause you to spend more than you can afford.