The average American owns more than three credit cards. They are a convenient, safe, and popular way to pay for nearly everything. Even though credit cards are everywhere, there are a few persistent myths that smart consumers should understand.
It’s alright to miss a credit card payment now and then.
Cardholders who believe this should read the fine print of their credit card’s terms and conditions. Credit card fines and fees add up fast, and after the second late payment within a twelve-month period, the company can impose a higher penalty interest rate.
The Credit CARD Act of 2009 says the “reasonable and proportional” late fee is a maximum of $27. A 2010 addendum to the CARD Act says those fees may be higher if the customer is a repeat offender. Paying late twice in six months or missing two consecutive payments could mean fees up to $37 for each missed payment.
One late payment won’t hurt a healthy credit score.
There are many factors that make up a credit score. A history of on-time payments on revolving charge accounts and installment loans carries 35% of the weight of the overall FICO score. It has more of an effect on credit scoring than any other single criteria. Payments that are over 30 days late can cause an otherwise healthy credit score to slide downward, triggering higher interest rates.
Making minimum payments on credit cards is a good debt repayment plan.
Paying only the minimum amount due each month keeps card holders in debt longer and triggers a lot more interest charges. Making only minimum payments on a $2,000 credit card debt at 14% APR means 14 years of payments and over $1,800 interest. Making $100 per month payments on that debt clears is up in less than two years and costs $290 interest.
People who plan to purchase a home may get a better interest rate if their debt-to-income ratio looks better. In many cases, FICO scores have a big impact on mortgage rates. One way to keep credit scores healthy is by keeping credit card balances as close to zero as possible. Mortgage interest rates have a big impact on monthly payments.
For example, someone with a credit score above 700 may pay 3.8% interest on a 30-year $200,000 mortgage loan. Their payment would be $935 per month. A credit score of 620 means a much higher interest rate of 5.2% and a monthly mortgage payment of $1,098. The person with a lower credit score will pay $163 more per month for the same mortgage amount.
Getting a credit card isn’t necessary.
Lots of people live without a credit card. Using cash or debit cards is possible nearly everywhere, and not having a credit card may seem like a simpler and less risky way to manage finances.
Many people get a credit card to use in case of emergency. Handling smaller car and home repairs before there is serious damage to deal with help keep costs down. Short-term loans can be expensive and may take time to secure.
A credit card is a tool that can make financial management easier. For some people, having access to a line of credit encourages impulse purchases. It’s important to be aware of personal habits regarding financial management and act accordingly.
Participating in credit card rewards programs isn’t worth the hassle.
While some people enjoy perks like free and discounted travel, cash back on purchases made with their credit cards, and zero interest with zero annual fees, others forgo using credit cards entirely because they think that rewards programs are just too hard to understand.
Credit card issuers and banks compete for new business, and for people who can successfully manage debt or plan to pay off the balance each month, the perks of owning a credit card can translate to thousands of dollars in savings and rewards each year.
