There is a lot of information circulating on the Internet and throughout financial institutions about the proper use of credit cards. Some of the information makes sense and a lot of it doesn’t because of not every tip allies to every situation. Because of the differences in everyone’s situations, well-intention advice could lead a person toward a credit card disaster. That is why it is good to know about some of the credit card use myths that could end up costing money.
- Myth: Emergency Funds And Credit Cards
- Myth: Lines Of Credit
- Myth: And Big-Ticket Items
- Myth: Online Purchases Are Risky
- Myth: Recurring Charges Are Risky
- Myth: Good Credit Scores Guarantee Maximums
Before applying the myths to your situation, it is best to look at your individual credit. Ask yourself how you use your credit cards and what you are doing to make sure you get the most out of them. As you read, think about how you could have done something differently and what you will do in the future to ensure you are not losing money.
Emergency Funds And Credit Cards
People have been told again and again not to use emergency funds to pay off credit card balances. While this makes a lot of sense, it all comes down to the math. Yes, you need your emergency funds for an emergency, but sometimes your financial situation can be an emergency. For instance, if your emergency savings account is earning 0.5 percent each year, but you are paying 20 percent per year on credit card interest, you’re seeing a major loss. You are losing approximately $160 for every $1,000 of credit card debt you have.
It has been said that it is best to use emergency savings to pay off high-interest credit cards and then just use the credit as emergency funds. This saves on the interest charges. Plus, the credit card company is more likely to raise the credit card limit so that the purchasing power is there when it is needed. In the meantime, it is still a good idea to have emergency savings, but it should come second to paying down high-interest credit cards.
Lines Of Credit
The second credit card use myth has to do with lines of credit. The reality is that consumers who use low-cost lines of credit to refinance high-interest balances do nothing about their out-of-control shopping habits. Unfortunately, many individuals will go back to further spending, causing them to run up the line of credit with the credit card balances. This puts the credit card holders into worse positions than if they had simply paid off the line of credit in the first place.
The way to get around this is to maintain the goal of reducing the debt and not being distracted by teaser rates, which are the low-interest rates that credit card companies use to draw in customers.
When it comes to big-ticket items, which is the third myth, it is said that cardholders should not charge big-ticket items. The truth is that cardholders can take advantage of rewards credit cards that have built-in benefits, such as extended warranties on items that are purchased by the card. There is also security insurance with a lot of cards that protect the items from theft and physical damage.
Even the cards that do not have any kind of purchase protection, there may be price protection. Price protection allows you to be reimbursed for the difference between what you paid and a lower price than you have found within 60 to 90 days of making the purchase. The card itself will determine the amount of time you have to make a claim after making the purchase. So it is a good idea to buy big ticket items, but a better idea is to pay off balances by the statement due dates so that the interest doesn’t outweigh the benefits of the card.
Online Purchases Are Risky
Buying online being risky is another myth because credit card companies are now putting in place zero-liability policies so that Internet shoppers can be protected against fraud. For instance, Mastercard is offering what is called SecureCode, which enables registered cardholders to designate a private code that they must enter in order to buy products from nearly 600,000 retailers. Verified by Visa is very similar to this, as it is pushing password protection for online purchases. Visa also has the E-Promise program that allows cardholders to direct credit card companies to reverse charges or cancel them when orders are not received or when delivered items are not as they were advertised.
Recurring Charges Are Risky
The fifth myth is in regards to recurring charges being risky when they are charged to a credit card. In all reality, automatically deducting recurring charges from your credit card provides an extra layer of protection between the biller and you. As a matter of fact, this assumes that you have met all requirements of the sales contract and that makes dealing with billing disputes much easier. As long as you hang on to credit card statements and all paperwork regarding the charge, you have a lot of ammunition when it comes to contesting charges.
Good Credit Scores Guarantee Maximums
Just because you have a good credit score doesn’t mean you are guaranteed the maximum credit line or that you can maintain that maximum. Credit card companies reserve the right to decrease credit limits at any time and without letting you know in advance. This is something to be vigilant of because cutting credit limits can impact a person’s debt-to-maximum ratio and can do so at dangerously low levels. This can then cause a cardholder’s credit scores to drop and that, in turn, justifies any interest rate hikes that other credit card companies want to impose, especially when they base those rates on credit score. (See: Mogo Credit Score Review)
Overall, it is important to keep balances low and to always keep an eye on accounts so that you do not fall victim to the many credit card use myths. Most of the time, you can just take advice with a grain of salt because everyone’s situation is different.