As long as there’s plastic in our pockets, there will be myths and misconceptions about credit cards. From confusion about closing credit card accounts to the effect that they have on your credit, urban legends about credit cards abound. Here are a few more common myths and misconceptions:
Misconception: Pay Off Credit Card Debt By Transferring Balances
The balance transfer credit card trick may be one of the oldest in the book for paying off credit card debt, but the fact that many have tried it with success doesn’t mean that it’s the safest or best way to reduce your debt. Transferring the balance from a big credit card debt to a credit card with zero or low interest can help you make a dent in your credit card balances, but only if you read the small print and make an effort to pay the best as quickly as possible.
First, make sure that the zero or low interest rate applies to balance transfers. Advertising a low or no balance card, but only applying the low or no interest to new purchases is a tactic that credit card issuers have been employing for years. If that low interest rate does apply to balance transfers, make sure that two conditions apply after the introductory rate ends:
- The interest rate should be lower than the one you’re currently paying.
- You should be in a situation that allows you to pay the balance down so that it is less than 75% of your available credit on the card. Otherwise, you’ll have an almost maxed-out card as soon as the introductory rate ends, and that never looks good on your credit.
Myth: Closing Credit Card Accounts Will Help My Credit
The myth that closing credit card accounts is good for your credit is one that has persisted for years, despite the fact that the opposite is often true — closing accounts can hurt your credit score rather than help it. If you have four credit cards, two of which have a zero balance and two on which you have charged 50-75% of your available credit, closing the paid off cards automatically raises your debt to credit ratio, and therefore hurts your credit.
Closing old credit card accounts and keeping newer accounts instead may have the same effect. It’s almost always better to have several open credit card accounts than to close all but one or two. If you fear accumulating debt simply because you have the cards, then cut up the cards or put them in a safe or safe deposit box where they cannot lead you into temptation.
Misconception: Using Credit Cards is Bad for My Credit
As the recession drags on and the spectre of credit card debt looms over many, using credit cards has gotten a bad rap. Credit cards are credited as being the fast track to deep debt and poor credit, but only one of those statements is true — while using credit cards recklessly can lead to debt, using a credit card is actually good for your credit. As long as you pay as agreed, that is.
Using credit cards responsibly, which means carrying a low balance or paying your card off in full each month, paying on time as agreed, and not opening more and more credit card accounts, can actually improve your credit score more quickly than your payments on an instalment loan such as a car loan or a mortgage. It’s only when you become irresponsible with credit cards that you damage your credit.
Image by sovietmole