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10 Credit Card Myths

    There is a lot of misinformation about how credit cards work. Some websites seem like they are providing expertise, but the information often isn’t accurate. The reality is that if you are basing financial decisions based on the urban legends of the credit card world, you’re only going to be hurting the strength of your financial future. Here are some facts that you’re going to want to know.

    #1. Debit cards don’t help your credit score. Debit cards look a lot like a credit card, but they don’t have an impact on your credit score. Why? Because the purchases made are automatically deducted from funds that already exist. Credit cards are like a short term loan. The credit card loans you the cash now and then you pay back the amount owed later.

    #2. More than the minimum balance needs to be paid. A surprising number of credit card holders believe that if they pay the minimum balance on their credit card every month, then they won’t be charged any interest. One look at a credit card statement proves that this isn’t true. Paying the minimum balance will work towards a positive credit score, but it could cost hundreds or thousands of dollars in interest over the long term life of the account.

    #3. You can check your own credit score regularly with no impact on your credit rating. . Many people believe that checking a credit score will create a negative impact. Although this fact is true when a credit application is filled out, checking a credit score or report will not impact A credit score negatively. US law even allows people to get 1 free credit report from each major credit reporting agency in a 12 month cycle.

    #4. Every credit card has a spending limit. Some countries require credit cards to list a minimum spending balance that will be approved with a credit card, but the United States isn’t one of these countries.

    #5. Fixed interest rates aren’t actually fixed. Although US law requires interest rates to be set at specific levels and they are generally attached to the prime rate, a fixed rate doesn’t have to stay at 11.9% APR. Customer behavior can actually dictate what the interest rate on a credit card can be. Missing payments can trigger a penalty APR, which could cause that 11.9% APR to jump to a higher rate overnight.

    Here are some more myths that readers will be glad to hear about.

    • Credit Cards Are Bad: Like most things in life, being responsible is the key factor. Credit cards are not inherently bad at all. In fact, they can be very convenient, allowing holders to use OPM (other people’s money) for up to three weeks for free. However, if users maximize their credit limit and do not have the means to pay off the balance each month, the high monthly payments will get larger.
    • Cancelling Card Used Infrequently is Good for one’s Credit Score: Generally, this is just simply false. Credit scores are based largely on the length of one’s financial life. If an account is cancelled, so too is the timeline associated with the account. So, not only is the holder unable to access money in a pinch, their credit score will likely tumble as a result. Time and good payment history are the only wayS to improve a credit score.
    • Annual Fees Are a Rip Off: Many higher end credit cards charge an annual fee of anywhere from $50 to $75 or more. In short, not only do holders pay to have access to the card, but they also pay interest like any other credit card on all purchases not paid in full each month. The only reason to pay a fee is if the perks of the card have something that is worth the annual fee, like travel insurance, or points or cash back bonuses.
    • Pre-Paid Credit Cards Are Better: The mere name “pre-paid” credit card is an oxymoron. The true name of these types of cards are called “Prepaid Card”. If a holder has already given the bank cash in advance, there is no credit! In short, these cards are really just a way to carry cash without the physical cash. There is no credit involved. Parents like to give these to their teen children for their needs and so they are not surprised at the end of the month.
    • Everyone Has To Have A Credit Card: False. While credit cards may be convenient and very useful during emergencies, the fact is no one has to have one. Over the last few years, many bank debit cards have greatly improved offering both convenience and points.

    The truth about credit cards is that they are convenient, providing consumers quick access to cash they otherwise may not have. But with any convenience, personal responsibility must prevail.


    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

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