5 Common Credit Card Myths
People have a lot of misconceptions where credit cards are concerned. And while many can be dispelled by reading the fine print (yes, a fixed interest rate can change due to missed payments, late payments, and other criteria, as outlined by the agreement), there are some that you simply have to be told. Here are just a few commonly held myths that you certainly don’t want to fall victim to.
- Paying the monthly minimum is enough. This is only true if you’d like to spend the rest of your life paying credit card debt and get no closer to actually paying off your card. Suppose you spend $100 on a pair of shoes, using your credit card. If you pay only the monthly minimum, those shoes could end up costing you three, four, or many more times as much as the original cost. You could have had some Manolo Blahniks for what you’ll end up spending on a pair of shoes from a retail store. Ouch. So try to use your credit card only for necessary purchases, and if at all possible, pay it off in full each month. At the very least you should be paying double or more the monthly minimum.
- Companies won’t approve a limit you can’t afford. This is so, so wrong. As long as you keep using your card, making your payments, avoiding going over your limit, and building your credit in other ways (through car, home, or small business loans, for example) your credit score should continue to improve and your credit card limit will keep going up. Most companies will happily front you more credit, knowing you can’t really afford it, just to keep you paying them endless interest. That’s how they make their money.
- Limited transactions are illegal. Okay, so technically a credit card is the same as money when making a purchase. So why do some businesses have rules about the minimum amount (say $5) that customers need to purchase if they want to pay with a credit card? Are they allowed to do that? To answer the first question, many businesses employ this rule because the credit card companies charge them a percentage of every sale in which a card is swiped, and it is often 2-4%, depending on the card. Business owners simply don’t want to pay this for small purchases. As for whether or not they’re within their legal rights to do so, the answer is yes. Businesses can refuse service for any number of reasons. If you don’t like it, you can shop elsewhere.
- Secured cards aren’t real credit cards. This is absolutely untrue. When you have poor (or no) credit you might have to start building credit using a secured card, whereby you send in a check for the amount of credit you’re fronted (say $500) which the creditor holds as collateral in case you don’t pay off the money you spent using your card. Generally, they hold the security deposit for a year, at which time they return it with interest (so long as you’ve been paying them regularly). They work exactly the same as other credit cards in that they work like cash and they help you to build your credit.
- Credit and debit cards are the same. Sadly, this is untrue. As you probably know, using a debit card draws money directly from your checking account and you do not have to pay it back at the end of the month, nor are you charged interest for using it (although you may have bank fees associated with the use of a debit card). What’s really unfortunate, though, is that using a debit card won’t help you to build your credit rating like using a credit card will. Of course, even the best credit card processor will cost you something, but the payoff is a better credit score.