4 Myths About Credit Cards That Are Hurting You Financially
Sure, credit card debt might have driven more than a couple of people over the edge, but that doesn’t mean you need to take out your scissors and start tearfully hacking away at your plastic. Your friend might have gone to jail for sniffing glue, but that doesn’t mean you need to hold anything against a good UHU stick, right? Credit cards can actually save you a ton of money if you know how to use them. Here are four myths it’s time to stop clinging to:
1. Credit cards are evil, use cash or debit cards instead
I know a 65-year-old retired lawyer who to this day doesn’t have a single credit card. He pays for everything using cash or cheque because he “doesn’t believe in credit cards”. Now, I think you’ll agree that you can’t “believe” in credit cards like some religion. You either know how you can use them to your advantage or you don’t.
Some people insist that using debit cards is “safer”, when they’re actually one of the most dangerous payment methods you can use. If some fraudster skims your card or gets hold of your card details, the money goes straight out of your bank account and you’ll never get it back. If someone tries to do the same on your credit card, you can dispute the charge once it appears on your bill to avoid having to pay.
I have about 8 credit cards, but owning them doesn’t instantly turn me into some crazed shopper.
I get a few hundred dollars’ worth of free money every year from my various credit cards, mostly through strategically using them to get cash rebates. I make it a point to sign up for interbank GIRO deduction the moment I receive a new card so I don’t have to bother trying to remember paying my bills.
Banks earn a ton of money from people who don’t pay their bills on time or use their credit cards to get cash. But if you know how to deploy these little pieces of plastic to serve your own purposes, you can be in the minority that reaps all the benefits of credit card use without letting the banks earn a single cent.
2. If you must, use only one or two cards and cancel the rest
Again, this is one of those things that sounds like prudent advice but is really only meant for people with poor self-control or terrible organisation skills.
Different credit cards offer benefits for different things. While OCBC Frank might be great for online shopping, it’s probably better to use a different card like Citibank Dividend for petrol.
- 6% rebate on online shopping
- 3% rebate on first 2 top-ups for NETS FlashPay Auto Top-Up
- 0.3% rebate on everything else
- Up to 5% rebate for entertainment
- S$60 monthly capped rebate with monthly offline min. spend of S$400 (excludes online and NETS FlashPay Auto Top-Up spend)
If you’re really strategic about your credit card use, you’ll try to find a suitable card for every single thing you spend on.
However, it’s also crucial to note that if you are spreading out your payments on different cards and not being disciplined about repayments, it might come back and bite you if you have to do something important like apply for a home loan, which as you should know by now, is also affected by your other outstanding debts.
If you have no clue what we’re talking about here, you really should be following us on Facebook.
3. It’s better not to accept a credit limit increase
After a few years of using a particular card credit card, you will start receiving offers from the bank to increase our credit limit.
You might think you’re unlikely to need that much anyway and refuse the increase because you’re scared it will hurt your credit score in some way. After all, debt hurts your credit score, and isn’t an increased credit limit an invitation to get into more debt?
Actually, doing so could hurt your credit score instead. When assessing your credit score, the Credit Bureau will consider how much money you owe as a percentage of the total amount your credit limit allows you to borrow.
This means if you spend $100 a month with a $10,000 credit limit, your credit score will be worse than if you spend the same amount with a $20,000 credit limit.
So next time the banks come calling, make them happy by agreeing to the credit limit increase, but then disappoint the poor buggers by continuing to keep your spending low.
4. Applying for a new credit card will negatively affect your credit score
While a new credit card does actually affect your credit score, when you understand how it does, you won’t freak out as much.
When you first get approved for a card, your credit score might drop a little, as the overall age of all the credit facilities open to you is one factor. A new card lowers the average age and will thus have a slightly negative effect on your credit score. The bank will also check your credit report when you apply, and each inquiry gives your credit score a little hit.
However, in the long term a new credit card can actually improve your credit score. Remember how borrowing a lower percentage of the total amount of credit offered to you is a good thing? A new credit card raises your available credit amount, so assuming you don’t go nuts and start spending like there’s no tomorrow, your credit score could well improve.
In short, getting a new credit card is unlikely to cause all the demons to escape from hell, so you can put down your amulets now.
There is one exception, however—if you intend to apply for a loan anytime soon, it might be better to hold off on any new credit card applications for the time being.
Have you ever fallen prey to any of the above myths? Let us know in the comments!
Tags: Credit Cards