This guest post was provided by Odysseas Papadimitriou of Card Hub, a website that makes it easy to compare credit cards.
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.
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.
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?