Common Credit Card Myths and Misconceptions
The world of credit cards is murky to many of us — danger may seem to lurk around every corner, and even the best credit card has the potential to be deadly to your credit score. Your best defence against making credit card mistakes is knowledge, and understanding some of the most common myths and misconceptions about credit cards can help you know what you need to manage the plastic in your wallet.
Misconception: As Long As I’m Making the Minimum Payment, I’m Okay
If you think that making only the minimum payment toward your debt is okay, you’re under the spell of one of the biggest credit card misconceptions. While making the minimum payment only will keep your credit from suffering, it really doesn’t do much to reduce your debt.
Skeptical? Consider this example: if you have a credit card with a balance of $5000 and an interest rate of 18%, and your minimum monthly payment is $125, it will take you 273 months, more than 22 years, to pay off that $5000. But that’s not the worst part – in those 22 years, you will have paid a whopping $6,923.14 in credit card interest!
Now, say you pay $175 dollars each month toward that debt. The monthly difference to your pocketbook is only $50, but in the long run, but the big difference? It will take you only 38 months to pay off your credit card debt, and you will pay $1,578.01 in interest, saving yourself over $5000.
Myth: Carrying Balances on Credit Cards is Bad for My Credit Rating
This one’s a bit tricky. Carrying balances on your credit cards may be a bad idea, but not for the reason you might think. As long as you’re making regular payments (of at least the minimum payment, of course) toward your credit card balances, you’re not necessarily hurting your credit – that is, until your balance hits your credit limit.
The closer your balance creeps toward your credit limit, the worse it looks for your credit score. However, the damage done to your credit limit is nothing compared to the damage done to your pocketbook. Carrying balances on credit cards is expensive, costing you more than you may be able to afford in interest fees. So, carrying a balance is worse for your finances than for your credit.
Misconception: Having Credit Card Debt is Bad for My Credit
It’s not really credit card debt that’s bad for your credit – rather, it’s how you’re managing that debt that may leave a poor impression. If you have three credit cards, on which you are carrying balances that are well under the credit limit, and you are making at least the minimum monthly payment on each card every month, you’re actually helping your credit, because you’re establishing a credit history that shows that you are using credit responsibly.
On the other hand, if you have three credit cards that are maxed out, and are missing payments or making them late, then yes, having credit card debt may be bad for your credit, because you’re showing lenders that you can’t be trusted to repay a debt as agreed.
Myth: It’s Impossible to Pay Off High-Interest Credit Card Balances
This one is a complete myth. It is possible to pay off high credit card balances and those with high interest rates, but in order to do so, you must be willing to get serious about putting a good portion of your income toward your debt repayment strategy. If you really want to pay off your credit card debt, you will probably need to commit to paying more than the minimum payment every month, even if it means taking on a second job or cutting your luxury expenses to the bone.
Don’t be taken in by these mistaken ideas about credit cards – used responsibly, they may be of benefit, and with a little dedication any credit card debt may be managed and reduced.
Image by Robert Couse-Baker
Related posts:
Of course, there are always exceptions to myths and misconceptions. :)
> Carrying balances on credit cards is expensive, costing
> you more than you may be able to afford in interest fees.
That is unless you carry a balance that has no interest. It is okay to make minimum payments, if you are paying off or paying down another card that has high interest on it.