Debunking 5 Credit Card Myths
If you ask for advice from any adult, they’d say it’s necessary to have a credit card to maintain and raise your financial health. Although it’s true to a degree, it’s best to carefully consider whether or not you really need a credit card.
Sure, it looks fun and convenient just to swipe a piece of plastic for your every purchase but remember, credit means loan. If unpaid by the end of the month, you can find yourself hurled into bankruptcy before you can even blink. To help you visualize it, here are five common misconceptions about needing a credit card.
1.You Need a Credit Card to Build Credit
You plan to apply for a home loan a few years down the road and you want to build your credit. Getting a credit card isn’t the only way to do so. You can build a reputable credit history by paying bills on time. This includes your rent, utility bills, and car payments. Just be sure to ask your landlord about getting your rent payments reported to credit bureaus.
In the same way, you can also destroy your credit when you don’t pay your bills on time. Utility companies can send you to a collection agency if you are consistently late on payments. This also means that if you avail of a credit card without being properly prepared for it, instead of building your credit, the opposite will happen. Debts don’t look good on your record.
In short, you don’t need a credit card to build your credit history. Yes, it might be easier but don’t avail of one if you’re not prepared financially. Having an unpaid balance on a credit card will negatively affect your credit score, and thus, your credibility as a payor.
2.You Need a Credit Card to Shop Online or Rent a Car
No, you don’t.
In many cases, your debit card can cover your online shopping needs and your car rental. In fact, a debit card can do almost everything a credit card can do and it’s spending money you already have instead of putting it on credit that you’ll have to pay in bulk by the end of the month.
If you plan to rent a car using a debit card, the rental company will put a hold against your credit card for a specific amount. This is just to make sure that you have enough money in your bank account to cover the service.
Sure, it may be more convenient to use a credit card for these services but you have to be sure that you have money set aside to pay off the full amount of these services at the end of the month.
3.You Need a Credit Card for Emergencies
Every swipe of your credit card is a loan you have to pay at the end of the month, so why depend on it during emergencies?
Instead, it’s best to set up an emergency fund. Ideally, your emergency fund covers three to six months of expenses. A sufficient emergency fund will allow you to weather a stormy period without going into debt, or at least, with a minimum amount of debt. It may also be a good idea to have your emergency fund in a savings account tied to your checking account, so you can easily transfer money between the two accounts.
4.You Need a Credit Card to Save Money on Purchases
This is a marketing tactic.
Many stores offer discounts to shoppers if they have a store credit card. This is not entirely out of the goodness of their hearts, however. Stores offer discounts for cardholders because they know that many people don’t pay off the card fully every month. This gains them more money through interest – they gain more than the discount they gave.
Unless you pay off the card in full every month, you’ll likely pay more in interest than the percentage discount you “saved”.
5.You Need a Credit Card to Earn Rewards
This line of thought can be very risky. Rewards usually have a disproportionate ration with the amount of money spent. It could be as low as 1 point for every $100 or so. It’s only an understandable financial decision if you can, and regularly do, pay off your credit balance every end of the month.
Weigh any annual fees and penalty fees against the rewards you might earn. Same with shop credit cards, credit card companies earn a profit on the balance a customer carries on a rewards card and that profit is usually higher than whatever the rewards cost the company.
Consider your options, there are also debit cards available now that offer rewards points.
Now that you’ve debunked these five common credit card myths, you’re now better informed to make your decision as to whether or not you still want to avail of a credit card.