7 Credit Card Myths That Just Won’t DieCredit Card Basics
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In my opinion, credit cards are more controversial than they ought to be. Of course, you have people like Dave Ramsey who are extremely against credit cards.
And then on the other hand, you have most millennial and Gen X financial influencers who love credit cards and getting credit rewards and travel points and things like that. Personally, I am not opposed to credit cards, I have a lot of credit cards, but I’m smart with my credit strategy. I have never paid a dime of interest to credit card companies, I stick to a budget, I don’t justify spending more than I would because, oh, I’ll get points. So I’m generally in favor of credit cards as long as they are used responsibly.
Unfortunately, there’s a big problem with financial literacy in the United States, and as much as half of the American population has never received a basic education on credit cards, how they work, and what the benefits and risks are for you as a consumer. So for this article, I put together seven “facts” I’ve heard about credit cards that aren’t actually true and that might end up moving you in the wrong direction. And hopefully by the end you understand a little more about credit cards and how you can use them to achieve your financial goals.
Don’t want to read? Watch the video here!
Also, before we begin, I want to mention a couple credit cards that I really like and use personally, first is my Citi Double Cash card, which gives two percent cash back on all purchases — that’s one percent when you make your purchase and an additional one percent when you pay your bill — with no annual fee and it currently offers a zero percent APR for eighteen months balance transfer option.
The other is my American Express Blue Cash Preferred, which gives me six percent cash back on up to six thousand dollars in spending at U.S. supermarkets per year. This card is currently offering a three hundred dollar statement credit if you put at least three thousand dollars on the card in the first six months, that’s about five hundred per month, it does have an annual fee of ninety-five dollars per year, but this annual fee is set to zero for the first year. Now, there is a no-annual-fee version of this card that I’ll talk about later. I’d appreciate it if you check out either of those links, it’s a great way to support my content. Alright, now on to the credit card myths.
1. Credit cards always charge interest
OK the first point is a belief that’s surprisingly prevalent, I think a lot of us grow up learning about how bad credit cards are and how much money you’ll lose if you have one, and so one thing I’ve heard from that is the idea that you’re going to be charged interest on your credit card purchases no matter what.
Of course, interest is one of the main ways credit card companies make money, so it’s good to be careful about carrying a balance and incurring additional charges. But the reality is that you won’t have to pay interest at all as long as you pay off any outstanding balances by your card’s payment due date.
In fact, the credit card company is legally obligated to give you some notice on your upcoming payments, so they can’t just stay quiet about your bill and hope you forget about it. The law says that credit card companies need to give you access to your statement at least 21 days before the payment is due. To be clear, that’s 21 calendar days, not 21 business days. So if you get your statement on the 5th of each month then they have to give you at least until the 26th to make that payment.
And if you log into your credit card company’s website or app, you should be able to see that information online. Most of the big providers make it easy to do paperless billing if you’d rather pay on your computer or your phone. So if you put a thousand dollars on your credit card on the last cycle and you pay the entire balance off by the due date, the credit card company is basically covering those purchases for free for up to three weeks.
On the other hand, if you only pay off $500 and you leave the rest to carry over to the next due date, then the remaining $500 is going to accumulate interest. So yes, credit card interest is something to worry about, and you can lose a lot of money if you let the balance grow, but if you only use your credit card to buy things you have the cash to cover then you won’t have to worry about losing money on interest.
If you’re having trouble making those payments at a particular time, maybe you get paid on a certain date and that doesn’t match up with your credit card payment schedule, you can actually ask your credit card company to change the due date. Now they’re not obligated to do that for you, but a lot of providers will let you make that adjustment as long as you don’t keep trying to move it back. And you might be able to make more progress on your credit card debt if your payments are due at the right time and you can put more money toward your balance every month.
2. Carrying a balance will help build your credit
Now the second tip is related to the first one, and as I said earlier credit cards are one of the most convenient ways to improve your credit score. There’s a really popular myth which says that the best way to build credit with a credit card is to carry a balance from month to month.
It intuitively makes sense that not putting any purchases on your credit card will prevent you from building your credit, since you’re not really demonstrating that you reliably pay off debt. But with that being said, carrying a balance is actually bad for your credit in most cases, and what you really want to do is increase your credit utilization without getting to the point where you’re carrying a balance.
OK that might be confusing, so I want to quickly explain the difference between your credit utilization and your credit card balance. You only carry a balance on your credit card when you fail to pay off the balance on your statement by the payment due date. So if you get a statement on the 5th of the month saying you have $1,000 in charges, but you pay those off before your due date on the 26th, you technically won’t be carrying a balance. On the other hand, you’ll still have credit utilization since you had a balance at the end of the last cycle. For example, if your credit limit is $5,000, then $1,000 would work out to 20% utilization, even though you paid off your balance in full before the due date.
Now different people have different perspectives on the ideal credit utilization, but usually anything higher than 30% can start to be a problem. 0% utilization probably won’t hurt you as much as really high utilization, but it’s still not as good as using at least some of your credit so that you can pay it off.
Your credit utilization is calculated based on your balance at the end of the statement cycle, so this can be a little complicated. If you put $5,000 on your card but you pay it off before getting your statement, then you’re going to end up with 0% utilization for that month. Personally, I would recommend looking at your balance at least a few days before your statement ends. That way, if you’ve charged more than 30% of your credit limit, you’ll have time to pay off some of that debt in order to optimize your utilization.
3. You should cancel any cards you’re no longer using
Another thing I’ve heard from a lot of people is that they automatically cancel a credit card whenever they stop using it. So maybe you had an entry-level credit card, you built up your credit, and once you had a decent score you applied for a card that offers better rewards. And once you have that you probably don’t have much of a reason to use the old card anymore, so it’s natural that you would think about canceling it and only using the new one. But keeping your old accounts active can help maximize your credit score, and in most cases I don’t think there’s any benefit to closing them unless they have an annual fee or something like that.
The main reason that canceling an old card can backfire is that the credit bureaus use the average age of your accounts to determine your credit score. Now this isn’t necessarily the key factor, making sure you make payments on time is the most important factor, but the average age of your accounts is nevertheless a factor. So I’m not saying it’s going to tank your credit if you cancel a card, but it’s still one of the elements used in the calculation of your credit score.
FICO weights your average age of accounts by 15%, so 15% of your credit score is determined by this factor. So what goes into this calculation? It’s going to be the age of your oldest account, the age of your newest account, the average age of every account you currently have open, and how long it has been since you used those accounts. If you have a card that’s ten years old, one that’s five years old, and one that’s three years old, your average age of accounts in this case would be six years, that’s ten plus five plus three, take that sum and divide by three.
But if you cancel the first card, then the average age of those accounts will drop from six years to four years, which is five plus three, take that sum, and divide by two. So your oldest card will now be just five years old instead of ten. Again, that doesn’t mean your credit is going to drop dramatically, but it could hurt you by ten, twenty, maybe thirty points depending on the specifics. And those numbers, depending on where you are on the credit score spectrum, could make a real difference in terms of the interest rates that are available to you when you apply for a new credit card or another form of credit.
4. Annual fees aren’t worth it
I know annual fees can seem really excessive if you’re comparing different credit cards, and I think most of us want to avoid those annual fees whenever possible. Annual fees can definitely be expensive, and you shouldn’t just ignore them, but at the same time paying even a substantial fee is sometimes worth it depending on the card you’re looking at and how it compares to any other options you’re considering. So if you’re choosing between two cards and one of them has an annual fee of $100, instead of just automatically going with the free one, make sure to double-check the details and see whether you might make up the fee over the course of an entire year.
One really common example of this is the American Express Blue Cash cards that I mentioned earlier. I told you about the American Express Blue Cash Preferred, which gives you 6% cash back on up to $6,000 in purchases at U.S. supermarkets per year and comes with a $95 annual fee. Well it actually has a sister card, the American Express Blue Cash Everyday card, that does not have an annual fee but only gives you 3% cash back on up to $6,000 of spending at U.S. supermarkets per year.
Right now, its welcome offer is only $200 with at least $1,000 of spending in the first three months. If you compare that to the American Express Blue Cash Preferred Card I mentioned earlier, that one offers a $300 welcome offer with at least $3,000 in purchases on the card in the first six months, and the Preferred’s $95 annual fee is zero for the first year. So sometimes it helps to spreadsheet this thing out, maybe I’ll do a comparison of these specific cards in the future, if anybody would be interested in that, let me know in the comments.
5. You only need to make the minimum monthly payment.
As I mentioned earlier, you’re going to get your monthly statement, and from there you’re going to have at least 21 days to pay off whatever balance you accumulated during that time. Your credit card company will set a monthly minimum payment depending on the card you have and your current balance, and that number represents the lowest amount you can pay while still avoiding fees and other additional charges.
A lot of people see their statement, maybe they see a $100 minimum payment, and they think “I guess I need to put $100 toward my credit card balance.” And in some situations that’s going to be all you can do, OK that’s fine, even though it’s not ideal, but when you only make the minimum payment you’re going to let interest accumulate on the rest of your balance unless you’re in the middle of a 0% introductory APR period.
So if you have a total of $2,500 in credit card debt at say 15% interest per year, and you only pay $100 off this month, the remaining $2,400 is going to grow at that interest rate. And with those numbers, paying off $2,500 at $100 per month, you’re going to end up spending over $3,000 by the time that balance is paid off, which means that you paid more than $500 in interest alone.
On the other hand, if you can bring that monthly payment up just from $100 to $200, then the total interest goes from more than $500 to just under $250. So if you just look at the monthly payment then it seems more expensive, but in terms of the overall debt it’s much cheaper to make additional payments in order to minimize interest.
Unsurprisingly, the difference is going to be even more important for larger debts. It was only around $250 or $300 on a balance of $2,500, but it ends up being almost $2,000 when you look at a balance of $5,000. And the reason it goes up so dramatically is that the monthly interest accumulation is a lot greater on a $5,000 balance, which means that a higher percentage of your payments is going toward interest, so it’s going to take longer to make progress on the principal balance.
So you should really try to look at the minimum payment as a minimum rather than a recommended amount. Yes, it’s fine if you can only make the minimum in some months, but you should try to divert some extra money to those balances when you have the chance, especially when you’re dealing with high-interest debt that’s going to grow very quickly.
6. Travel cards are better than cash back cards
As I mentioned earlier, the relative value of a credit card depends on how you use it. So if you tend to spend a lot of money on travel, then a travel card is probably going to suit your needs. With so many cards out there, it can be hard to find exactly what you’re looking for, and I’ve seen a lot of people recommend particular cards that work for them without considering that other people may not have the right spending habits for whatever that card offers in terms of rewards.
For example, the Chase Sapphire cards that I brought up are great for anyone who’s a big spender in travel or dining and who travels a lot, particularly internationally, but they might not be worth the annual fee if your spending is mostly in other categories and most of your travel is domestic. Sometimes cash back cards are going to be more effective, and sometimes you can even get extra rewards by taking advantage of any promotional offers that the credit card provider is running. So I would say instead of getting the first credit card you hear about or just getting one that looks good, do a little extra research before you commit and see if there’s one that works better for your spending.
7. You should never cancel a credit card
OK, I know one of the first myths I brought up was that you should cancel your old cards if you aren’t using them anymore, but the last myth I want to bring up is basically the opposite, that it’s always a bad thing to cancel your credit cards. I think I went over most of the downsides of canceling credit cards pretty well earlier, but now I want to focus on some of the situations in which it might make sense to cancel a credit card even considering those negatives.
Personally, I think the most obvious reason to cancel a credit card is that you’re paying an annual fee and you’re no longer using the card. So if you, say, have a premium travel card with an annual fee of $500 or $600 then it’s really important to either cancel that card or see if the credit card issuer would be willing to downgrade you to a no-annual-fee option. I recently did this over American Express Chat with my Hilton Honors Aspire Card, it didn’t take long at all, got it figured out entirely over chat with a customer support representative, I said, “Hey, we’re probably not going to be doing a lot of staying in hotels right now due to the pandemic, I’d like to downgrade my Aspire Card with its $450 annual fee to the no-annual-fee Hilton Honors Card, at least right now. This kept my account history intact and did not affect my credit score like canceling the card outright would do.
So in general, I would recommend reviewing your statements and rewards history every year, at least a few weeks before the card gets renewed so that you can crunch the numbers and make sure it’s still saving you money. Now another situation that I think is worth bringing up, it isn’t necessarily going to apply to everyone, but some people have trouble limiting their spending when they have access to credit cards. So if you know that’s a trigger for you, it might just be better in the long run to cancel your cards and take away that option. Again it totally depends on the individual, certain people can use credit cards responsibly with no problems, but it’s important to recognize if your cards are becoming more of a negative than a positive in your life.
Thank you so much for reading, I really appreciate your support. Please remember to take a second to check out the credit card links I mentioned if you’re interested in any of those cards, that would really help the blog out, and I will see you next time.
Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.