Common Misconceptions About Credit Cards
Scott Sery is a contributing writer for Card Journalist where he writes about everything dealing with credit cards including how to use them to travel for almost free.
Before the mid 1990’s credit cards were somewhat of a novelty. Many people had them in case of emergencies, but they rarely ever used them. When you went into a store and paid with your card, the cashier (and most people in line behind you) would groan. The cashier had to take out a large clunky device, slide a carbon paper over the card to make a couple of different copies, and then it was submitted for payment. It was a cumbersome process. However, improvements on phone lines and internet have switched the roles of credit cards and checks. Now if you pull out your checkbook people will groan that you’re holding up the line. The point is, credit cards are still a relatively new commodity. And with anything new, there are a lot of misconceptions that go along with the use of credit cards. Here are a few.
Carry a Balance to Boost Your Credit Score
Shortly after I turned 18 I got my first credit card. I had several friends tell me that to build my credit score faster I should start carrying a small balance (just a few dollars each month). One had even heard it from his mom who works at a local bank. Some quick research showed this myth will do nothing more than waste money on interest.
A Lower Limit Boosts Your Credit Score
One of the items that FICO looks at when determining your score is how much of your monthly limit you use. For instance: if you have one credit card with a $1,000 limit, and you charge $990 every month, then you are using 99% of your limit. If you have one card with a $10,000 limit and you charge $990 each month, then you are using 9.9% of your limit. The lower the percentage that you use, the less risk of default you pose, thus the higher your credit score.
I Just Need to Pay the Minimum
Technically this is correct; you only need to pay the minimum. However, this is a foolish decision due to the outrageously high interest charged on credit cards, and it may actually hurt your credit score. Notice the example above; if you max out your card, and then you only pay the minimums, you are keeping your balance near 100% of your limit. A high percentage, especially for an extended period of time, means your score could go down.
They Aren’t Safe
With news coming in every few months about how certain retailers have been hacked, and credit card information may be compromised, it is easy to believe that credit cards are not safe. However, consider this scenario: you are travelling, and you have $1,000 in cash in your wallet. If your wallet is stolen, there is no way (aside from tackling the thief) to recover your money. If you have no cash and only a credit card, you can cancel the card and you will not be liable for any fraudulent purchases. Would you rather be out $1,000, or out the hour or two to cancel your card and file a fraud claim?
Travelling with Your Credit Card
Most people know that traveling with a card is a good idea. Not only do you rack up rewards points, but you also get some perks that you wouldn’t otherwise get when you pay with cash. Take these perks into consideration before paying with cash:
- Free auto insurance. Did you know that when you pay with your credit card, you will likely get the rental agency’s extended coverage for free? If you pay for it, you are paying for something you already get for free.
- Free travel insurance. Many cards offer free travel insurance. This covers you in case your luggage is lost, and possibly other misadventures.
- Free hotels. Certain cards offer perks where if you have an overnight layover, they will cover the cost of your hotel.
- Free Travel Planning. Most cards offer a concierge service that is almost never used. If you have a trip coming up but no time to plan it, just call and have your card company arrange the details.
- Free Airline Ticket. Many cards that are offered by major airlines offer a companion ticket. Once per year you pay for your ticket (at full price) and a companion can fly for free (just pay taxes). My favorite companion offer is from Southwest Airlines.
- Free checked bag. If you used your airline card to purchase your tickets, you may be entitled to a free checked bag.
- Free Airport Lounge. Certain airline cards will allow you access to these exclusive lounges in the airports.
- Free extended warranty. Traveling or not, many cards will give you a free extended warranty on big purchases. This means if the item is lost, stolen, or broken you can get it replaced for free (even if the manufacturer’s warranty has expired). This goes for cell phones, so don’t waste your money on those insurance plans.
- Free fraud protection. The biggest perk of any credit card is that you aren’t liable for fraudulent purchases. Most will be wiped from your card the instant you call in, and removed permanently if the investigation determines that you aren’t liable.
Wrapping it Up
Credit cards are wrought with myths. For some reason many people are still suspicious about how they work and if they are actually going to help them. Those who embrace the card, and are responsible with their spending, can get a number of free rewards and perks. As usual, check with your card to see which perks are offered.
How do you use your credit card? Have you taken advantage of all that it has to offer?