Credit Card Debt and the Myths to Consider

Have you ever noticed how frequently you receive credit card offers? They may come in the mail, through email, or when you make a purchase with online retailers.  Often, these solicitations will say that you are pre-approved and that your purchase would be worth so much more, either in savings or rewards, if you open a new credit card. If managing your debt, enhancing your financial situation or improving your credit score are part of your goals for the year, some of these offers might sound like a great idea.  You also may hear a lot of opinions from friends and family who believe having credit cards is not only a necessity, but a luxury with “reward points!” Regardless of how tempting the benefits sound, having a credit card only leads to one thing – more debt.  It may be debt you feel you can pay off easily but it is still debt and will add weight to your shoulders.

The best way to improve your financial health is to pay off consumer debt as quickly as you can.  Having more cards in your wallet will likely take you in the wrong direction.  However, for many people, living without a credit card seems impossible.  While it is certainly not the norm, as illustrated by statistics on credit card use in America, it is possible and also very healthy.  To better understand how to live without credit card debt, we need to explore the more commonly referenced beliefs that encourage you to jump on credit card offers.  There are a lot of marketing dollars spent to help you believe these myths.

Myth 1: Opening new credit cards will improve my credit score.

If you are exploring homeownership, you may be searching for ways to improve your credit score.  Credit scores are comprised of five factors, the largest of which is payment history.  Your ability to make timely payments impacts 35% of your score. Every time you miss a payment, you risk your credit score dropping.  Frequently, a low credit score indicates that you have not always been able to meet your debt obligations.  Conversely, making timely payments on debts and other bills, has a positive effect on your score and increases lenders’ confidence in your ability to repay debt.  Opening another credit card, especially if you have not always been able to make your minimum payments, is not the solution. Your focus should be on making as many timely payments as possible on the debt you already have.  The more credit cards you have to manage, the more likely you are to miss a payment.  If making timely payments is a challenge for you, call one of our Financial Advocates to learn about our debt management solutions.

Some of the other factors contributing to your credit score also highlight the importance of focusing on existing debts rather than establishing new lines of credit.  Your debt-to-credit ratio – how much you owe versus how much credit you have available – represents 30% of your credit score; the second largest factor.  Making payments, ideally more than the minimum balance, and striving to not use your credit card for future purchases will lower that ratio.  The third largest factor (15%) is length of credit history. This means, that accounts you opened many years ago will have a more positive impact on your score than ones you open today.  In fact, opening new accounts can harm your credit score.  Hard inquiries and new lines of credit contribute to 10% of your score’s makeup.

Myth 2: I need a credit card to earn rewards.

The most attractive argument to encourage you to open a credit card is the dangling of rewards.  Everyone loves to win and earning points, miles or cash back gives you the feeling of victory.  However, in order to truly win with credit card rewards, you have to be perfect at paying off your balance every month, sticking to your budget, and only using the card for planned expenses. Even if you think you can live this perfect lifestyle, you should consider the risks you are taking and make sure they are worth the “rewards”.  Credit cards make it easy to spend more than you had planned each month.  When that happens, you may end up without enough cash to pay off the full balance due and ultimately, you will incur interest and possibly late fees. Additionally, some credit cards require an annual fee for usage.  When you add up the potential risks they typically outweigh the value of the points or miles you earned.

Myth 3: I need a credit card for emergencies.

Using debt for emergencies could compound the crisis you are facing. Establishing emergency savings funds is key to staying out of debt and building a path to wealth.  If you are living paycheck to paycheck, your savings goals will need to start small but they must be intentional.  Do you live in a house with older appliances? Do you have an older car that is nearing the end of its useful life? Take time to anticipate large expenses. Also consider unanticipated emergencies such as major medical procedures.  Once you know how much money you will need in an emergency, you can start building it into your budget.  There are going to be circumstances when you have absolutely no choice but to use a credit card to take care of medical bills or emergency repair work on your home. Strive to use existing lines of credit in those circumstances rather than opening new credit cards. However, while that may be your situation today, it does not have to be like this forever. Keep working towards your savings goals, make them a priority, and you will be surprised how emergencies do not seem so bad when you can pay for them without debt.

Myth 4: I need a credit card for online purchases.

The answer to this myth is simple – debit cards will work just fine. For a majority of purchases you will make, a debit card will be accepted just as a credit card. The major difference between a debit card and credit card is that a debit card withdraws money directly from your checking account, rather than against a line of credit. Understanding the differences between debit and credit cards, as well as the financial impacts of each, will highlight the benefits of sticking to debit transactions.  There are some situations where using a debit card may be trickier than credit, such as renting a car.  When faced with that challenge, call the retailer to discuss what payment options they have other than credit. There are also options like PayPal and Venmo that can be used for online payments with actual funds from your bank account rather than credit card debt.

It is not easy to find a friend or family member who does not have a credit card, and likely you have at least one credit card.  Your focus should be on paying the debts you have and not opening additional lines of credit when trying to improve your financial health.  Besides debunking the myths above, there are other reasons not to get a credit card for you to consider before signing up for new offers.

For a better understanding of your current debts and how your history impacts your credit score, you should sign up for a personalized Credit Report Review with one of our Financial Advocates.  They will explain your report and help you create an action plan to improve your score and financial situation.  You can also call CCCSMD at (800) 642-2227 before opening up additional credit cards to make the strongest financial decision possible.