Credit cards – don’t we all have them? For some, credit cards are the reason we struggle with debt and yet they are also one of the best ways to improve your credit score.
Actually, when used properly, credit cards can be a benefit to your overall financial picture. Let’s examine a few of the myths surrounding credit cards and their use and uncover a plan for smart usage.
Myth #1 If you have bad credit, you can’t get a credit card.
It is a common misconception that credit card companies will reject your application if you have a low credit score, however, there are options. One of the best options, when trying to re-establish your credit is getting a card that is secured. You send the company a security deposit amount and then, depending on the card, you will be given a credit limit that matches the security deposit. Some cards even allow your balance to exceed the deposit provided you are making regular, on-time payments.
Myth #2 You have to carry a balance on your credit card each month to establish a credit history.
The only thing that happens when you carry a balance on your credit card is that you end up paying interest on that amount. As often as you can, pay off the balance each month. The fact that you use the card and pay on time and in full is enough to show your ability to manage your credit effectively. We never recommend carrying a balance on a card when you have the ability to repay. There is no reason for you to do that.
Myth #3 Credit cards are a bad way to make purchases, you are better off paying cash for everything.
This is a rather “old school” philosophy for making purchases. However, today there are a number of benefits to using a credit card for large or unusual expenses. The first of which is the opportunity to show your ability to manage your finances and pay off your balance due in a timely manner. It is impractical to think that you can purchase a car or house with saved money without some amount being part of a loan and banks require a credit history to approve your loan agreements. Therefore, while paying in cash is a great way to stay on your budget, having some credit card usage is important for establishing a credit history. Recently, one of our partners attempted to pay an airport parking facility with cash and the facility refused to take cash, insisting that the charge is paid with a credit card.
Myth #4 Debit cards and credit cards are the same in terms of benefiting your credit score.
While Debit cards and Credit cards look similar, how they work and how they affect your credit score is vastly different. When you use a debit card, the dollar amount is immediately removed from your account. While they help keep you on a budget, credit companies do not use their performance when determining your credit score. Additionally, if your debit card number is stolen, any purchases illegally made are taken from your bank account and therefore, can be more challenging to recover. Also, some businesses require a credit card rather than a debit card, such as car rentals. It is a benefit to have one of each in your possession.
Myth #5 If you go over your credit limit, but pay it off right away, your credit will remain unaffected.
While some credit cards will approve a purchase that takes your balance over the limit, you run the risk of having your overall interest rate increased on your entire balance due going forward. Make sure you read the fine print of any credit card agreement and keep an eye on your statements for the amount of interest you are paying on any carry-over balances due.
Myth #6 Paying off one credit card with another is a good thing.
Actually, you are not able to directly pay one credit card with another, however, you are able to do a balance transfer, usually at the time of signing up for a new card. This can benefit your overall financial picture by decreasing the interest rate you are paying on the first card. Know that when you transfer the balance of one card to another that the new balance will not be eligible for any reward points. A balance transfer may be advisable when the card company that is accepting the balance has a much lower interest rate charge.
Over the years, the professionals at Bankruptcy Advocates have had the opportunity to counsel hundreds of people who have found themselves in debt due to credit card usage. If you are struggling to pay your bills, if creditors are calling and you don’t know what to do next, give us a call.
Southern Illinois Bankruptcy Attorney law firm Bankruptcy Advocates is located in Carbondale and serves a wide geographic community. We are a debt relief agency. Our southern Illinois bankruptcy attorneys help people file for relief under the Bankruptcy Code. The first consultation is always free. Give us a call at 618-549-9800 or email us at [email protected] to speak about your case or legal matter. Convenient appointment times are available.