John Morell at CreditCards.com reviews a slew of myths regarding credit cards. Three of the most important to debunk from a debt standpoint are:
1. “You need one of each of the big cards — Visa, MasterCard, American Express and Discover — in your wallet because you may be stuck someplace that accepts one and not the others.”
2. “You can give your credit score a boost by paying more than you owe.”
3. “If you go over your credit limit and pay it back before the due date, you’ll be fine.”
1. “You need one of each of the big cards — Visa, MasterCard, American Express and Discover — in your wallet because you may be stuck someplace that accepts one and not the others.”
As someone looking to get organized and pay down debt, there is no need to add even more credit cards to your wallet in an attempt to make sure that you’re covered for all situations. More credit cards spell danger: additional cards can tempt you to spend a larger net amount through credit lines; more cards increases the likelihood of holding revolving balances on multiple cards; and organizing, identifying, and understanding the details to whatever outstanding debt you hold is that much more complicated. In the end, building a debt plan to reduce your outstanding debt is going to feel more challenging and cumbersome with a pocket full of plastic and, as Morell writes, having one or two of the major credit cards logos covered is already enough for most situations.
2. “You can give your credit score a boost by paying more than you owe.”
While it is good advice to pay down debt as aggressively as possible, do not confuse such activity with behavior that positively impacts your credit score. In fact, actions that help you to pay off debt are not always coterminous with boosting your credit score. This is because a high credit score is more closely associated with holding a lot of open credit lines ready for spending, yet refusing to utilize them – essentially being tempted and able to get into a lot of debt. So for someone with revolving credit card balances from month to month, the risk of giving in to temptation and spending can be much more dangerous than having a series of cards, each with large limits that slightly bump up your score.
3. “If you go over your credit limit and pay it back before the due date, you’ll be fine.”
One of Morell’s most critical accomplishments here is identifying the myth that spending beyond one’s limit on a particular card is fine as long as it is paid off before the payment due date. Spending over one’s credit limit is not a good idea in almost every case. For one, the existence of that limit, set by the credit card issuer, represents the limit to risk they are willing to take with you from a debt standpoint. As a result, one should not approach this limit, and in reality the best credit card behavior is either: (1) no credit card usage, or (2) usage as a convenience for small purchases in situations where you are certain they can be paid off immediately if it were necessary to do so. Second, as Morell writes, the overage fees one is hit with can be large, complicating debt reduction, while an even greater danger is any related jump in interest rates on the card, which sours your debt repayment environment over the long-term.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
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