By Andrew Housser
If today's advertising rules your world, you might think credit cards are the king of all transactions. One series of TV advertisements even implies that people hold up lines and incur the wrath of other shoppers if they slow things down by using cash.
The reality, though, is that credit cards are not the be-all and end-all for today's consumers. In fact, with at least some consumers, credit cards might be losing ground. A survey conducted for the website CreditCards.com found that in 2010, 29 percent of people did not have a credit card, up from 10 percent a year earlier. In the recent economic environment, some people might have set aside their plastic voluntarily. Others may have had their credit card account closed -- either at their choice or the issuer's.
The finding confirms that any presumed overwhelming use of credit cards is a myth. Plastic is not the only way to pay. Other common myths about credit cards include the following.
1) I cannot get good credit without a credit card.
A credit score is not built on credit card use alone. In fact, credit histories consider a range of spending behaviors. While using a credit card modestly can help build a credit score, it is also possible to build a credit score by taking out and repaying a personal loan, such as an auto loan or a student loan. Whatever tactic you use to build a personal credit history, do not over-borrow, and always pay on time. On-time payments alone count for 35 percent of a credit score.
2) It's OK to carry credit card debt.
Sometimes this rationalization causes people to borrow well beyond their means. "Just this one little thing…" can become a mountain of debt that is difficult to pay off. When you can't pay in full, the card lender adds interest, and fees begin to mount. The wisest move: Never permit yourself to carry credit card debt. If you cannot pay your purchases in full at the end of every month, do not charge them.
3) As long as I pay the minimum payment, I'll eliminate my debt.
While this can be technically true, it can take years or even decades to pay down credit card with minimum payments alone -- and even this assumes that you do not charge any additional purchases to the credit card while making the minimum payments. In fact, card lenders now must tell you how long it will take to repay a debt by making only minimum payments. But take a closer look at that box on your credit card statement. If you pay more than the minimum, you can repay the debt months or years sooner -- and save tremendously on interest charges.
4) Creditors cannot repossess items I buy with an unsecured credit card, so there are no repercussions to defaulting.
Credit card balances definitely impact your credit score. A default will be sent to a collections agency and reported to credit scoring agencies. You could suffer from lower credit scores and the hassle of a debt collector's calls.
5) I should close credit card accounts I'm not using.
Some people believe having too many credit cards can harm your credit score. But having unused credit can actually improve your credit rating, as it shows creditors that you do not immediately run up debts when credit is available. In addition, a positive payment history on your oldest credit cards can benefit your credit score more than on newer cards. In general, it is a good idea to close a credit card account if it is tempting you to spend beyond your means. It's more important to stay out of debt than to play the credit score game.
6) It's OK to go over my credit limit as long as I pay it back before the due date.
Going over your credit limit has many impacts. It can reduce your credit score, so that future credit costs you more. More immediately, it can result in extra charges and an increased interest rate. Stick with your limit. If for some reason you need a higher limit, ask the credit card lender before making a purchase.
7) My credit card debt will die with me, so it doesn't matter what I charge.
Credit card debt does not always die with you. Specific laws vary by state. But in general, when someone dies, his or her estate must repay the credit card debt, thereby reducing any inheritance left to loved ones. And if you have a joint account with a spouse, he or she may be liable to repay your spending after you pass on.
8) I wouldn't receive credit card offers if I couldn't afford them.
A credit card offer is not like a pre-approved mortgage. The credit card lender has likely looked at your credit report, but has not checked your income and expenses and gauged what you can afford. Remember that, in general, the lender wants you to spend carry balances and pay them interest -- for a long time. Don't fall for it. Instead, research and choose one credit card with no fees attached, and use it carefully.
9) If I get to a point where I can't pay my credit card bills, bankruptcy is my only option.
In reality, many potential solutions exist for people struggling with credit card debt. Among them are debt consolidation home equity loans, debt management programs that can offer interest rate reductions, and debt settlement (also known as credit advocacy) for those in need of significant payment relief and principal reduction. There is no one-size-fits-all approach. The solution that is right for each individual will depend on his or her particular situation.
Credit cards can serve as financial tools that are a helpful part of a money management strategy. But remember: They can only help you when you are in control. By educating yourself about the facts of credit card usage, you can become a smarter consumer -- and control credit cards instead of letting them control you.
Myth: I should always close credit card accounts I'm not using. (©George Doyle/ Valueline/Thinkstock)
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC and its wholly owned subsidiary, Freedom Debt Relief, a national consumer debt resolution firm that has served nearly 100,000 clients and manages more than $1 billion in consumer debt. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
