This guest post was provided by Odysseas Papadimitriou of Card Hub, a website that makes it easy to compare credit cards.
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There’s a lot of good information out there about credit cards. Unfortunately, there’s also a lot of misinformation circulating as well. Personal finance, and especially credit card use, can be tricky. There are a lot of little rules to remember and monthly tasks to tackle. And now, there are new laws to adapt to as well. It’s hard to keep it all straight. Therefore, you might be operating under certain assumptions that you’ve picked up along your financial travels that are actually false and are hurting your credit performance. So, read up on these common credit card myths and mistakes and start righting these wrongs now.
Let’s start with the myths.
Myths
1. My credit card will only benefit my credit score if I use it
If you’ve been relying on flawed personal finance principles, the odds are your credit score isn’t as high as it could be. It’s extremely important to have the highest possible credit standing, and you can accomplish this whether you use a credit card or not. While routinely making purchases and paying them off in full will more quickly improve your credit standing, simply having an open credit card at zero balance will help as well because your monthly credit utilization will be low (0%) and you will still get reported as being in good standing on a monthly basis. As a result, your major credit reports will fill with positive information, thereby improving your credit. Thanks to the CARD Act, you no longer have to worry about inactivity fees, so don’t hesitate to lock your card in a drawer.
2. You can only transfer credit card debt to a balance transfer credit card
Balance transfers are a great way to save money on interest. However, many people believe that only credit card debt can be transferred. In reality, however, you’re typically allowed to transfer any type of debt to a balance transfer credit card. Therefore, if you have a relatively small balance remaining on an auto loan, for example, you might be able to transfer it to a credit card in order to pay it down interest-free.
If you are attempting to make such a balance transfer though, there are two important factors to consider: the amount of time it will take to pay down your debt and the issuer of your balance transfer card. Before opening a balance transfer credit card, you must use a credit card payoff calculator to make sure you’ll be able to pay down your debt before the introductory period concludes because after this occurs, interest rates typically jump to around 15-20%. Additionally, some credit card companies, like Capital One, no longer approve applications for the transfer of debt that does not originate from a credit card. You should therefore also make sure to check issuer policies before opening a card with the intent of transferring non-credit card debt.
Knowing the truth behind these myths will help you avoid making mistakes in your credit card use. Speaking of mistakes, here are some others to steer clear of.
Mistakes
1. Not having a credit card with no foreign transaction fees when traveling abroad
Most credit cards charge fees for each purchase that you make overseas. As these fees typically amount to about 3% of each transaction, they can really add up over the course of a trip, augmenting the already-expensive cost of overseas travel. Therefore, before setting off, you should check to see whether your credit card has foreign transaction fees and, if it does, open one of the growing number of credit cards with no foreign transaction fee. Capital One has the widest selection.
2. Spending all of your available credit
It’s not enough to pay your credit card bill on time and in full each month. In order to garner the best possible credit score, you should also keep your expenditures well below your credit limit. Credit scoring agencies, like FICO, include an amount spent-to-credit available ratio called credit utilization in your credit score. The lower this ratio is, the better. The importance of your credit utilization ratio also increases with your credit limit. For example, there isn’t much of a difference between charging $125 and $175 in a month when your credit limit is $200, but there is a significant difference in spending $2,500 and $4000 when your credit limit is $5,000
3. Getting distracted by rewards
Rewards credit cards are attractive, sure, but if you don’t have excellent credit and you don’t pay your bill in full every month, your focus shouldn’t be in opening one. Why? Because you have other needs and a rewards credit card might provide less financial benefit than will a credit card that helps you save money on interest or efficiently improve your credit standing. While rewards are often perceived as being something you jump at the chance to get, they’re actually not the most rewarding credit card feature for many consumers.
[Kevin] Thanks for sharing this guest post, Odysseas. I can actually relate to the foreign transaction fee mistake, as I came across that issue myself when using my own credit card in the states. I didn’t make many purchases, but I can see how the transaction fee can add up quickly, especially if you make a lot of small purchases.
So, reader, what are your thoughts on these myths and mistakes?
Thanks, I did not realize there are cards that do not charge foreign transaction fees.
I need to get a card with no foreign transaction fee. Usually we withdraw cash from ATM and use that, but even the ATM has foreign transaction charges.
Kevin, This is a useful guest post. There is a dizzying array of information on credit cards and it’s easy for anyone to become confused!
@Krantcents-There is only one company, Capital One, that I’m aware of that does not charge foreign transaction fees. We travel a lot internationally, and are mindful of the many ways you get dinged while abroad.
I see so many travelers who pay 3% fees!! Even my dad does this! It drives me nuts! When I was traveling, I paid 1% to withdraw cash with a credit union ATM card, and even that was a mistake — a Charles Schwab card would have let me do it for free.
Ah..I remember the days when there were no transaction fees on credit cards or atm withdrawls on foreign cards. In fact I lived a whole year in the UK with my US credit card and bank account. Times have changed but it’s good to know that capital one has some without those feels.
Transaction fees are getting crazy… inflation i thank thee. but seriously i’ve made same mistakes paying traveling fees because it was easier.
Some genious somewhere came up with “Reward Points”, because I think they’ve really messed with alot of our minds, even mine. We might know that a purchase is foolish, but think about the reward points!!
Haha! This type of thinking is awful, but we’ve all done it haven’t we? We know it makes no logical sense, but those golden rewards points sure are tempting.
It seems the international fee thing is pretty common! I guess one way to get around it is also to transact less often and not use the CC for many purchases.
About the reward points, I definitely agree with you. They should be seen as a side benefit not as a reason to use the CC. If you’re only buying something for reward points you might be asking yourself where all your money went down the road!
I too need to get a card with no foreign transaction fees. Especially since I am considering a vacation out of the country.
I take advantage of two rewards cards. I pay off my cards in full every month, so I see this as an interest free 30 day loan with rewards added on. Any way I can screw over a bank makes me happy since they screw over too many consumers!
Very good post, quite timely as I am considering getting a new CC.
Points are a side benefit for me too.
Practical tips! Rewards cards are of no use if you intend on keeping a balance! I too got a nasty surprise with the foreign transaction fee! There are some cards that don’t charge this though and worth getting one if you travel abroad frequently.
I couldnt agree more on your point about reward cards. Sometimes the best card for you is one that doesnt charge interest for a period of time, provided you have a balance. Or like you said, one that doesnt charge foreign transaction fees if you travel abroad a lot.
If you don’t realize the agenda, you will surely be tempted by those attractive credit rewards. So, you spend more and more on your credit card to pursue those points, until you finally achieve the results. But the fine thing is, did you spend all those money wisely? Were the items useful? And to top it all, you still have to pay for those credit, so were you the wiser one to jump at the chance to get that reward? 🙂