Credit cards are everywhere and you might imagine that any myths about them have been debunked. That would make sense given that most people have at least one credit card.
We recently asked our Addition Financial members to tell us about the most surprising financial myths they had heard and we got a lot of responses. Some made us laugh – we can promise you that an itchy palm doesn’t mean you’re coming into money.
We were surprised at how many of the myths our members shared had to do with credit cards and debt.
Here are six of the top credit and debt myths. Most we heard from our members, but we’ve included a few others that we think are important for you to know the truth about.
#1: Credit Cards Are Bad
By far, the most common credit myth that we heard is that credit cards are bad. We can understand why this myth is persistent. The average person in the United States carries $6.354 in credit card debt, while the average Florida resident has $6,388 of credit card debt on an average of 3.2 credit cards.
Another number that jumped out at us is this: only about 40% of Americans have enough money to pay their credit card debt. That means the majority of us will pay significant amounts of interest, and take a long time to pay off our debt.
For some people, credit cards lead to excess spending. When you’re buying on credit, it’s easy to forget about your budget because your bank account won’t be impacted – at least not immediately – by your spending.
That said, credit cards are not inherently bad or evil. In fact, they can be an extremely useful financial tool if you use them properly. For example, using a credit card responsibly can help you:
- Improve your credit score
- Qualify for a mortgage or car loan
- Rent an apartment
- Build a solid credit history
The best way to use a credit card is to pay it off every month. That way, you won’t pay interest and finance charges and you’ll demonstrate your financial responsibility. And, if you choose one of Addition Financial’s rewards credit cards, you can earn cash back or points while you build your credit.
#2: It’s Always Best to Buy with Cash
Our second credit myth is closely related to the first. Several of our members said they had been told it’s always better to buy with cash than it is to buy with a credit card. Or, on a related note, they’d been told that it would “hurt more” to buy with cash than with a credit card.
With this myth, we’d say that for some people, it may actually be true. If you’re a person who has a tendency to go overboard with spending, you may do better if you go shopping with a set amount of cash and leave your credit cards at home.
Another option is to shop with a secure debit card instead of a credit card. Debit cards pull money directly from your checking account, which means you can only spend what you have. That makes them a good way to shop without accruing debt.
However, we do think you should keep in mind that avoiding credit cards and paying with cash may make it very difficult to build a good credit history. Buying with credit cards shows potential lenders – including mortgage lenders – that you are a good credit risk. If you have a credit card and pay on time, you’ll have a good credit score and the ability to qualify for mortgages and loans.
#3: Credit Cards Cause Debt
Our third myth also has to do with credit card debt. We heard from several members who mentioned the following credit myths:
- Getting credit cards is bad because it creates more debt
- Credit cards cause debt
- There’s no way to avoid debt if you have a credit card
We think these myths may be due to an incorrect cause-and-effect assumption. Of course it’s true that if you never have a credit card, you will never have credit card debt. You can’t accrue debt on a card you don’t have.
That said, it’s not a given that having a credit card automatically leads to debt, and it certainly doesn’t create debt. Overspending is the cause of credit card debt. And even then, there’s more than one way to look at it. People who have credit card debt aren’t irresponsible by default.
It is possible to have credit cards without accruing or carrying debt. The key is to use your cards responsibly. If you’re worried that you might overspend, then you should create a budget that includes a line item to pay your credit card in full each month.
#4: Credit Card Debt Isn’t a Big Deal
One of the most disturbing credit myths we heard was from members who have been told that it’s best to have as many credit cards as possible, or that there’s nothing wrong with running up a huge balance on a credit card.
We’re not here to be the credit card police, but it’s undeniably a bad idea to apply for every credit card that comes your way or to run up high debt without a plan to pay for it.
One of the things that accounts for 30% of your credit score is something called revolving debt, which is also known as credit utilization. It’s a reflection of how much your available credit you use. Here are some examples:
- If you had available credit of $5,000 and carried a $4,500 balance, your credit utilization would be 90%.
- If you had available credit of $10,000 and carried a $4,500 balance, your credit utilization would be 45%.
The higher your credit utilization percentage is, the lower your credit score will be. If you routinely use most of the credit that’s available to you, then you will have a credit score that’s lower than what it might be if you paid your debt – or used less of your available credit.
Using that logic, you might think that applying for additional credit cards would help. After all, you’d have more credit available and that would reduce your credit utilization, right?
Unfortunately, it’s not that simple. Having several cards may be a good idea, but only if your total credit utilization is 30% or less. If you can quality for a card with a decent interest rate and it will lower your utilization enough to make a difference in your score, then you may want to apply for an additional card.
#5: Applying for a Credit Card Will Hurt Your Credit Score
Our next myth comes from financial expert Clint Proctor of Wallet Wise Guy. Clint says that one of the most persistent myths he hears is that applying for a credit card will do significant damage to your credit score.
Like many of the myths on our list, this one contains a partial truth. As Clint says:
“… Nearly every time I share a credit card opportunity with someone, they tell me that they're hesitant to apply for a card because they don't want it to hurt their credit score.
But this is largely a money myth. Yes, hard credit inquiries will momentarily ding your credit score, but not in any dramatic way. According to myFico, hard inquiries only account for 10% of your overall score. In my experience, hard credit inquiries often drop my score less than 10 points.”
He points out that getting a new credit card will increase your available credit. And he also touts the benefits of applying for cards that offer cash back, points or airline miles as rewards. Provided you don’t go overboard applying for cards, you’ll likely see only a small, temporary dip in your FICO score.
#6: Debit Cards Are Safer to Use Than Credit Cards
Our final myth is one that we hear often enough to make it worth mentioning. A surprising number of people believe the myth that it’s safer to shop with a debit card than it is to shop with a credit card.
The truth is that credit card users have greater legal protection than debit card users. The Fair Credit Billing Act limits consumers’ liability in fraudulent credit card use to only $50. The amount is ten times as high – $500 – for debit card theft and fraud.
Why the difference? With credit card theft, no money has left your account. The same cannot be said with a debit card, since debit cards pull money directly from your linked bank account to pay for what you buy.
In other words, you’ll have more protection with a credit card than you would with a debit card. We want to note that debit cards do offer some protection, including chip technology. Many financial institutions offer fraud protection and fraud alerts as well, both of which make it easy to catch unauthorized spending on your debit card.
Part of being financially responsible is understanding the truth about common credit myths and debt myths. We’re always happy to answer questions and do what we can to ensure that our Addition Financial members are informed about the best way to protect themselves financially.
In the market for a new credit card? Click here to learn about Addition Financial’s credit options or apply for a new card today!
Posted on Feb 9, 2020