More Myths and Misconceptions About Credit Cards
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.
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Average age of cards is not a big part of the calculation of your credit score. On time payment and debt/credit ratio are the two biggest factors. Even when you close a credit card, the age is calculated on your report for 10 years before it drops off. What hurts your credit score is the debt/credit ratio change, not that you closed the card.
The article does bring about awareness that what intuitively makes sense does not always and typical does not apply when it comes to improving or degrading your credit history. It is almost impossible to properly cover even a few myths about credit with just a few paragraphs. So, I forgive the author and give them an A for effort. “Paying off credit cards with other low/zero interest cards offers.” It is seldom a solution and more of a band-aid. If your goal is to pay off your all your credit card debt and think a balance transfer is going to help… Think again. If you could pay it off with a balance transfer, then you can pay it off without one. The solution is some certified competent credit counseling. As far as closing accounts being “good”. Keyword “good” then it depends on how you define “good”. The feeling one might get from finally paying off that credit card they have grown to despise is worth more than a credit score and will fuel paying off other debt and avoiding or cause serious thought before entering into new debt. Besides, as far as score, it depends on the cards actually history. A twenty year old card hardly ever used will have almost no impact on score when closed particularly with other accounts with robust history. Now, if it is the only card/accounts and/or with a robust history, then that could be enough to affect a point or two on interest. Again… It depends. No silver bullets. As far as using a credit card being good or bad for your credit. Again, it depends… Making a purchase and paying it off right away, in short, does not “help” or “improve” your credit. Even carrying a small balance. Certainly how the average Joe might think. In short, credit scores are a very sophisticated calculation taking into numerous variables and statistics. If improving your credit history was simple, then theoretically everyone would have a high or decent score. That is why the algorithm for calculating FICA is such a well kept secret. The real secret to a good credit score is to not need one. If making a major purchase, put a large down payment. Finance companies are about risk. Credit assigns a risk factor. If the collateral is worth a quick sale at $10,000 and you owe $5,000 then you should get a pretty low rate; however, once you have a history of not meeting your obligations, then it gets challenging. In summary, we are not taught anything significant about money, credit, proper health, law or marketing tricks in school. Meanwhile, these are the very things that get us in trouble with money, credit and life as a whole. If people could first realize they don’t have to have credit before they mess up their credit the better off they are when they choose to use it. Our commercialize society has brained wash us into thinking we “must” have credit. Credit is simply a tool. Granted it can be a very handy one, however, not a must.
Wow, thanks for that careful summary! It’s true, there’s far more to credit cards than can be expressed in a single article. Hope you enjoy looking around the other articles on this site!