When it comes to credit cards, there are dozens of myths surrounding the industry, some of which can be financially harmful to those who believe them. As with anything in life, you shouldn’t always believe what you hear without further investigative research first. The credit crisis seen in Australia was spurred primarily because of two reasons: overspending and ignorance of credit card practices (at both the consumer and creditor levels).
Instead of falling prey to credit card traps, the following guide will help you to discern which “facts” are actually myths.
Debts Paid = Great Credit Report
Most of us have once held indebted balances on our credit cards, which is fine. However, even if you paid it off many years ago, it will still remain on your credit report for years to come. Why is this? Well, credit reports log seven years of credit activity—balances, late payments, etc.—and just because you paid something off doesn’t exactly make it disappear. Furthermore, even if you are diligent about paying off your entire balance on time, each month, your credit score may still be affected if you spend close to or at your limit. These scores are designed to instantaneously interpret your use of credit, and if you’re using a majority or the maximum of your available credit, this will hurt you, point-wise.
Use Credit for Everything to Keep Track of Expenses
No, no, NO! This is especially common in younger credit card users who want an easy way to keep track of their budgets without having to input anything manually. Unfortunately, this not only gets you close to (or over) your monthly credit allowance (which, as we can see from above, will negatively affect your credit score), but it means you are needlessly using credit on disposable goods, such as groceries. Financial experts always advise credit card holders to pay for food and other non-durable items with cash, even if it means a little more accounting calculations for your monthly budget.
Creditors Know What Limit You Can Handle
Creditors are not your friends. They are in the business solely to make money off of the interest payments of credit card users who do not pay off the full balance at the end of the month (or they charge annual fees as another way of making money). If they assign you a higher limit that initially seems like too much for your income level, listen to your intuition. Creditors often assign higher credit limits than their customers can afford, simply because a higher limit means a higher likelihood of increased spending (which incurs more interest for their profit margins). If you feel as though a credit card company has given you a higher limit than what you can reasonably handle, call them up and request it to be lowered so you won’t give into the temptation to spend just because “the line of credit is there anyway.”
Co-signing is No Problem
If you have a family member or child that is getting their first loan or credit card and need a co-signer, beware. This may help them out, but if you’re not 100% certain that they’re responsible with their finances, you may want to say no to the co-sign. Why? Because if they default on a loan or make several late payments on a credit card, this negatively impacts not only their credit score, but yours as well. Sound unfair? It’s not, and here’s why: when you co-sign, you are telling the creditor that you believe this person is responsible enough for the item you are co-signing for, and in this good faith, you promise they’ll be making their payments on time. If the risk of faulty payments is there, then don’t co-sign, for the sake of your credit score.
Rewards Cards are the Best*
Not necessarily. They encourage you to spend more than you should in a desperate pursuit of “points and mileage.” Impulsive spending is already problem in Australia to begin with; rewards cards have made it much worse. They often have higher interest rates and annual fees, too. If you want a plain and simple credit card with no frills, just a line of credit, then go back to the basics and get a rewards-free card.
As you can see, there are many misconceptions regarding credit cards that still persist, even to this day. Avoid falling into the traps listed above by following the basic guidelines provided. Your credit score and wallet will thank you.