5 Common Myths About Credit Cards
You may think that having a credit card is a necessary part of maintaining financial health. And while having a credit card can be helpful in some situations, you should carefully consider whether or not you really need a credit card before you sign up for one. The truth is, in many cases, you can get by without a credit card.
Another important point to consider is that credit cards can be useful tools when used properly (paid in full every month), but they can be a bigger liability than an asset if you do not manage them carefully.
If you find yourself struggling with credit card usage and credit card debt, you may want to choose to close your credit cards and move to a cash-only system until you pay down your debt. Here are five common misconceptions about needing a credit card.
I Need a Credit Card to Build Credit
Actually, you can also build credit by paying your bills on time. For example, you can build enough credit to qualify for a home loan by paying your rent and other utility bills on time for several years.
Alternately, you can destroy your credit when you do not pay your bills on time. The utility companies and other businesses can send you to a collection agency if you are consistently late on payments.
The bottom line is this—You do not need a credit card to build your credit history. Sure, it may be easier to do with a credit card, but you should be very careful when signing up and using credit cards. In fact, carrying a balance on a credit card can actually negatively affect your credit score, especially if your debt-to-income ratio is high. This is why it's important to manage your credit card usage carefully and pay the bill off in full each month.
I Need a Credit Card to Shop Online or Rent a Car
In many cases, your debit card will cover you if you need to rent a car or shop online. In fact, you can do almost everything with a debit card that you can with a credit card – except spending money that you do not have.
For example, you can use a debit card to rent a car. The car rental company will put a hold against your debit card for a specific amount, so be sure to have that much available in your checking account. While it may be convenient to have a credit that you use solely for renting cars or paying for hotel rooms, they are not necessary. Keeping this in mind can help you determine when to use a debit card instead of a credit card.
Though it can be easier to manage a car rental or a hotel rental while on vacation with a credit card. If you choose to use a credit card for this purpose, be sure that you already have the money set aside so that you can pay off the full amount in your next billing cycle and avoid carrying a balance on your credit card or paying unnecessary credit card interest.
I Need a Credit Card for Emergencies
Credit cards should not be your fallback in the event of an unexpected emergency. Instead, you should set up a fund for emergencies. Your emergency fund should have at least $1,000.00 in it, but you should try to have three to six months of expenses saved up.
A sufficient emergency fund will allow you to be able to handle any emergency that comes your way, without going into debt. It also may be a good idea to have your emergency fund in a savings account and tied to your checking account. Generally, most emergencies will allow you time to transfer money from one account to another one.
I Need a Credit Card to Save Money on My Purchases
Many stores will offer discounts for having a store credit card. Stores do not offer cards to give you discounts; they offer cards because they realize that while most people intend to pay the card off every month, few actually do. They make more back on interest than they do on the discount they offer to you.
Think about the 10% savings you get on the purchases: You will likely pay more than that in interest on the card if you do not pay it off in full every month. If you really need or want access to in-store discounts, some stores now offer a debit card option with similar savings. Consider using that instead.
I Need a Credit Card to Earn Rewards
Using credit cards to earn rewards can be risky. It's only a wise financial decision if you pay off your balance in full each month. In other words, if you can actually afford the purchase you make on your rewards credit card. You should also make sure that you have a credit card with no annual fee.
It's also important to remember that the credit card offers its rewards because most people are not going to pay off their credit cards in full each month. This means that the company earns a profit on the balance a customer carries on a rewards card, and that profit is often much higher than what the rewards cost the company. As with store credit cards, there are debit cards available now that offer rewards points.
Updated by Rachel Morgan Cautero.