Credit cards: friend or foe?: 5 myths of using a credit card

 

Is a credit card a powerful friend or a foe? There is a lot of misinformation that can cloud your judgement when trying to answer this question. Here are 5 common credit card myths:

  1. “Credit cards make you a slave to debt”

A common misconception about credit cards is that once you fall into the debt trap rat race it’ll be hard to escape. Well not necessarily. As I mentioned in my previous post on debt, good management of debt can open doors for you but mismanagement will ultimately close these doors plus more. Using your card wisely by paying in full each month, spending what you can afford or only using your card for emergencies will ensure you do not fall into the debt trap.

Getting a credit card is a good way to begin your credit scoring as no credit, unfortunately means bad credit. Prepaid and debit cards do nothing to build your credit history as they don’t reflect your ability to borrow, behave sensibly and pay back the money owed.

  1. “How much I spend doesn’t matter. My limit is there for me to spend it.”

 Maxing out your credit card has two problems:

  1. If you spend more than you can afford, you wont be able to pay your full balance by the due date. As a result you’ll have to pay interest on the remaining amount.
  2. Signals poor money management as you’re raising your credit utilisation. It will appear as if you’re using credit to fund your lifestyle, which doesn’t bode well if you’re trying to maintain a healthy credit score.

 

  1. “I only need to pay the minimum payment because carrying a balance is good for my score.”

Approximately 54% of borrowers believe this statement is true, but unless you have a 0% interest card, carrying a balance will simply cost you money. You should aim to pay your balance in full each month so you avoid paying interest. If you don’t have a payment plan in place, this debt can snowball and become difficult to manage if it is growing faster than what you are paying to keep it down.

  1. Credit card interest starts once you make a purchase

Only cash withdrawals incur interest once withdrawn. For purchases, the interest begins once the payment is due. So if you pay your balance in full by the due date, there is no interest for you to pay.

  1. “An increase in my credit limit is good” 

This statement is a bit hazy as it can be good and bad. Lenders increase credit limits as a way to influence you to spend more money. If you do so and go beyond your means the lender begins to profit off your mismanagement (interest on unpaid balance). However, if you are responsible with your spending this can work to your advantage as your credit utilisation goes down, therefore improving your credit score.

We hope you found this useful! Have any more myths to add? Let us know in the comments..

Already have a credit card and need some tips of how to manage it better, check out this post 

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