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5 Credit Card Myths Unveiled

 

Credit Cards are a keystone of Americans’ purchasing habits. They are no doubt the best financial tool available today as it is easy to carry, provides funds for an emergency and increases your credit scores.

However, like any other financial product credit cards do seem to create a certain amount of anxiety. A Nerd Wallet survey found that a surprising number of Americans are struggling with basic credit card issues ranging from credit scores to revolving debt to reward cards. This is due to the fact that credit cards are surrounded by certain rumors and myths.

So, when it comes to credit cards, it is important to know how to separate truth from myth. Here are five popular credit related myths which plague the consumers, plus the facts that repudiate them.

 

Myth 1: Using a Credit Card can hurt your credit score.

Fact-   Credit card usage does not hurt your credit score.

One common misconception regarding the usage of credit cards is that many people fear that it would hurt their credit score. Well, it is time to burst this myth. The fact is that it should be the first step a person must take towards building a credit score. Credit scores are calculated on the basis of the past use of debt and credit. The irony of credit score is that if you do not have debt or you do not use your credit, you don’t have a score. It will be difficult for you to get certain jobs, apartments and loans in the future.

Tip:  Even if you like paying your bills as you go, it is wise to get a credit card and pay off your credit every month to maintain a credit history. You should also keep your credit utilization ratio between 20-30%.  A credit card can hurt your credit score if you do not use it wisely and rake up huge outstanding bills.

 Myth 2: Maintaining a balance on your credit card helps your credit score

Fact: Not paying your dues can hurt your credit score.

A majority of consumers (54%) are under the impression that carrying a monthly debt balance improves their credit history. This is entirely wrong as this is the worst financial mistake you can make. The minimum amount due is the amount you need to pay to avoid any late charges. It is only a fraction of your total due and varies from bank to bank.

In a short term it is nothing but a myth. You will be relieved that a burden has been lifted from your shoulders but the trouble will start when the interest on the balance unpaid amount accumulates and will be bouncing back to be paid. Your debt will build up in a huge pile and you will soon find yourself neck deep in a pool of debt. Your credit scores will see new lows along with your finances and it will also hamper your ability to raise funds in future.

 

TIP: The best strategy is to use your credit cards and pay off your bills in full each month, so you can keep your overall debt-to-credit limit low. 

 

Myth 3: Getting Rid of Old Cards Helps Your Credit Score

Fact: No, it is just the opposite

Another myth about credit cards is that old credit cards hurt your Credit Score. But, the truth is just the opposite. The saying “old is gold” is very true in this scenario. If you leave your old cards open it may have a number of benefits.  Firstly, they bear testimony to your long time money management skills. Secondly, the older the credit account the more value it adds to your credit history (determines 15% of your score). The other important benefit is that it will keep your credit utilization ratio (the amount of available credit compared to the credit limit) low. It influences 30% of your FICO score.

TIP:  You should avoid closing an old card without a good reason to do so. If you find that the fees associated with your old card are outweighing the benefits you might consider closing the account.

MYTH 4: You can improve your credit score by using a debit card. 

Fact: It will have no effect on your credit score.

 

Though both credit cards and debit cards appear identical, they are at the opposite side of the spectrum and serve different purposes. With a debit card you withdraw money out of your own account whereas, on the other hand a credit card means borrowing short-term funds from financial institutions which you should pay back in full. Your credit score reflects your repayment ability and lenders look at your behavior when you borrowed previously. Prepaid cards and debit cards will not help you better your CIBIL score as there is no involvement of debt in the process.

TIP: You should use your credit card for everyday purchases and loans which you really need and pay them off in full before the due date. Avoid withdrawing money from your credit card as you will be subjected to high fees and high-interest rates and this   will quickly subtract any short-term gains.

 

Myth 5 – Keeping many cards is bad for my credit score.

Fact- The number of credit cards that you’re holding will have no bearing on your credit score.

This myth is conceived from the belief that every card plays a role in increasing your debt.  But the fact is no one credit card can satisfy all your needs. You may need an Airline Credit Card for discounts on flights and hotels, a cash-back credit card to get some hard earned money back in your account and a shopping credit card to get special discounts. Your friends and relatives may discourage you to have more than one card as they are worried that it would play a role in increasing your debt. But as long as you are using your credit cards wisely it will not negatively affect your credit scores. You just have to keep a tab on the amount you spend on each card and pay your bills in time.

TIP: You should not apply for too many credit cards at one go. This could lead banks to reject your request as you will look like a person who is desperate for finance and you have no means to repay your debt. So you should space out your applications for credit cards.  Secondly you should not be impulsive with your purchases. Finally, avoid piling up tons of credit cards that have high annual fees.

If you have been assailed by any such myths it is time to embrace facts. It will help you to be more discerning in decision making and build a strong financial foundation.

If you know about any other credit card myth or rumor you want details on you can connect with us on Facebook or Twitter.

 

EVERYTHING YOU SHOULD KNOW ABOUT STORE CREDIT CARDS

With today’s fast lifestyles credit cards are important for consumers and retailers because carrying cash or using checks are often more time consuming compared to retail electronic payment technology. Consumers have a lot of choices when it comes to credit cards like standard credit cards, premium credit cards and store credit cards.

There are many reasons why you would take out a store credit card. Whether you are just waiting in line at the shop to find out if you can save on that day’s shopping or the store offers you the promise of saving money in future, these cards will regularly find their way into your wallet (or phones via an app). Almost all big retailers offer their own cards which will allow you to take your purchases home with a very nice discount and without having to part with a penny at the cash counter.

These rewards and discounts are often tempting but can applying for a store credit card come back to bite you? Here is what you need to know about the upsides and downsides of using these cards and also the effect they will have on your credit scores.

Upsides of Store Credit Cards

    • Special Perks: The main benefit of store cards is that it offers an initial discount of 10% to 20% when you sign up and you may also get extra discounts the entire year if you shop at that retailer. Many store credit cards offer even more such as rewards programs which may feature other special benefits, such as bonus coupons, free shipping, free gift wrapping or free exclusive financing offers.

 

    • Easier Qualification: Store credit cards are specifically designed to work for individuals with all levels of credit quality. So if you do not want to apply for a secured card or are unable to qualify for a general-purpose credit card then a store credit card can be a good option. It also allows retailers to escalate their customer reach.

 

    • Retailer Discounts: Most retailers promote credit cards as a great way to save money. So, when you sign up for a store credit card you will not only receive an initial 10 -20 percent discount but may also be in line for extra discounts all year long.

 

    • Many stores may also offer you 0% interest on financing offers. They will give you twelve or eighteen months interest-free finance to pay off a major purchase with their credit card.

 

    Store credit card holders are also the first to receive special coupons or gain access to exclusive sales events. Everyone loves saving money, but make sure that you do not overindulge and go on a spending spree.

Downsides of store credit cards.

    • Limited Use: Some retail credit cards may offer the same flexibility as a regular card, but most of them are closed-loop credit cards that are limited to purchases at that particular store or a chain of stores. In addition, these store credit cards may have a low spending limit and can impact your credit score.

 

    • Have a High-interest Rate: The biggest negative is that they always have high-interest rates. So, if you plan to carry a balance or have trouble staying within your budget store credit cards is not a responsible choice. According to a survey by CreditCards.com in 2016 the average APR on America’s retail-branded credit cards had increased to almost 24 percent, which is far higher than the average for all credit cards (15.18%) The high APRs of typical store credit cards mean that you will have to pay hefty interest charges if you do not pay your balance before the end of the grace period and that would completely negate the 10-15 percent discount that you had received on your initial purchase.

 

    • They Encourage Debt: Another negative is the temptation to spend more when you have a retail credit card. Stores frequently offer cardholders’ incentives like discounts, emails about sales and also rewards on your spending. Many retailers will continuously raise the credit limit of your card to increase your spending. You should follow the rules of spending only on what you can afford and keep the balance below 30% of the credit limit. If you are not disciplined with your spending you could easily find yourself in debt.

 

    Potential misunderstanding: Generally when you sign up for a store credit card in-store you are not given a full explanation of all the terms and conditions at the point of sale. Typically you will be given a brochure with the credit card terms and you really may not have enough time to examine the costs of the card and compare it with other credit cards and be sure that you are getting a good deal.

How Store Credit Cards Affect Your Credit

People who are looking to establish or rebuild credit history may find a friend in retail store cards. If your credit score needs some polishing a store credit card can help you build credit. It is a great way to build credit as retail store card issuers normally approve people with lower credit scores. However, co-branded store cards are harder to qualify as people with higher credit scores will get lower interest rates.
When you apply for a new credit product like a store credit card, the issuer will perform a hard inquiry on your credit report. This is generally not harmful to your credit as many consumers will see only a temporary credit score hit of about five points. However, if you apply for several store credit cards at once it could be harmful to your credit rating especially if you have a short credit history or few accounts.
Your credit utilization ratio is one of the key factors that influence your credit scores. Store credit cards usually come with a low credit limit of about $500. So by using store credit cards, you can reach a credit utilization ratio of 30% with a purchase of just $150 dollars.
However, if you use your store credit card sparingly, keep a low balance and pay off your bills immediately, the available credit on your store card can drive down your utilization rate and increase your overall credit.
You can establish a credit history by using and paying off the bills on time and also reduce your debt-to-credit limit ratio by using it sparingly and keeping statement balances low. This makes up 30 percent of your credit score. It will also establish a pattern of good habits which in turn will boost your score.

Bottom Line

You can benefit from store credit cards if you are responsible and pay your balances each month. Still, you should take time to understand the advantages and drawbacks of store credit cards. You should also check out the other credit cards in the market to find out one with better rewards and lower interest rates.