Many people were taught to believe that credit cards are bad, or worse they were taught to spend to the max. Both concepts are wrong.
A bank or a financial institution issues credit cards to enable customers borrow money to pay for goods and services. It requires cardholders to pay back at a specific period with interest and charges. Owning a credit card offers many perks, including increasing your purchasing power, protection against fraud, etc.
However, even though a survey revealed 86% of people own at least one credit card, many people still have misconceptions based on what they've learned over time.
This article debunks common myths about credit cards and also offers suggestions on how to use the credit card effectively.
Let's take a look.
Here are common misconceptions about credit cards and the truth.
Although spending over your credit limit can provide short-term relief when you are stranded, it's not a healthy choice; especially when done over time. This is because spending over the limit attracts extra charges, which may increase your debt, and ultimately damage your credit score. Therefore, avoid spending above your credit limit if you can.
Your annual fee depends on your spending habits. It is also based on the value you will get for the amount you pay in a year. For example, you may pay $200 in annual fees and enjoy valuable travel perks like free hotel stays or free checked bags on trips. If you consider these incentives, it may be worth paying yearly fees for your credit card.
Having just one credit card is good, especially if you just begun building your credit score. It's a great way to control your spending, but this doesn't mean you have to limit yourself to one card. If you have multiple credit cards and make payments on time, you can still build a good credit score. You can also select credit cards that provide the perks aligning with your lifestyle to maximize your credit card benefits.
Your credit card will require you to make the minimum payment. However, although it may be convenient to pay just the minimum every month, it's best to pay more than the minimum for some reasons.
First, when you pay just the minimum, it will take longer for you to pay off your balance. However, paying a little over the minimum will help you pay off your debt faster. As a result, you will pay less interest, saving you money. Additionally, it reduces your credit utilization ratio, improving your credit score.
Opening a credit card isn't going to harm your credit score if you have good spending habits and pay off your debt on time. However, a credit card may not be the best option if you have a low credit score. It’s best to keep your credit score high if you plan for a huge loan in the next few months. So, you may want to delay owning a credit card in such cases to increase your chances of acquiring the loan.
A credit card offers many advantages, but understanding the truth about them will let you maximize its key benefits. So, in this article we explained the most common myths around credit cards to enlighten you on what it truly means to own a credit card.
If you would like to learn more about managing your finances, explore Adultology courses. We are an online learning platform dedicated to helping you make better lifestyle choices.
Categories: Financial Planning and Investing