Growing up, our parents warned us of the various scenarios to be cautious of: hanging out with questionable friends, drugs and alcohol, getting in a car with a stranger (basically Uber, go figure), wasting money on frivolous purchases, the list goes on and on. Our parents want nothing more than to point us in the right direction, I get it.
And boomers and Generation X parents had a lot of reasons to be skeptical of credit cards, which is why so many parents have advised their kids to stay far, far away from credit cards.
In the 1980s, the popularity of credit cards as a method of payment skyrocketed as credit card companies began to market heavily towards college students. Unfortunately, deceptive marketing practices from the banks and the lack of oversight from universities caused large financial ripples for uneducated students. The incredible offer of a free beach ball or frisbee led thousands of college students to get buried in debt. It was such a scandal at the time that there is an entire documentary, called Maxed Out, made about the deceptive practices that the credit card companies used.
Now, credit cards are much more heavily regulated and you will be hard pressed to find many offers around college campuses. Negative feelings about them, though have persisted.
My analogy about credit cards is this: “Credit cards are like fireworks. When used properly, it is a beautiful show. When used inappropriately, they will blow up in your face.”
With that being said, I want to break apart the myths so many of us have been taught about credit cards. And no, I am not a credit card shill in case you are wondering, I’m just a super fan.
Myth # 1: Credit Cards Are Bad
This is incredibly subjective, but wildly wrong. Most people that say this have been put in bad financial positions because of their misspending.
While the interest rates of credit cards are high, you will never pay a penny of interest if you pay your bills on time and are responsible with them.
Myth # 2: Credit Cards Will Ruin Your Life
Credit cards have caused many people to become financially insolvent and even declare bankruptcy. This is among people using credit cards to spend out of their financial means, though, and that’s very much a personal choice.
To the contrary, credit cards can help you boost your credit score and give depth to your credit history.
So no, they won’t ruin your life if you use them responsibly.
Myth #3: You Don’t Need A Credit Card, Just Use Your Debit Card
While a debit card is simple to manage, there is a large risk associated with debit cards.
If your debit card ends up in the wrong hands, your hard-earned money is at risk of being stolen. Along with this, your card could be in your wallet or purse and still fall into the wrong hands through internet fraud and data breaches. Of course, many banks now have fraud protection, but investigations can potentially take weeks, leaving your money inaccessible.
When a credit card is stolen, it’s not your cash that is being stolen and you are much more protected for the most part. Many personal finance experts recommend that in order to protect yourself fully, to not use your debit card except to pull cash out of an ATM.
Myth #4:You Must Carry A Balance To Improve Your Credit Score
This is incorrect. There is absolutely no reason to ever hold a balance on your card. The one instance where it’s not a bad idea to hold a balance is if your credit card has a 0% interest rate. Even then, do not take your time paying it off as holding a balance is a detriment to your score.
Let me explain…
Your credit score comes down to five factors: Payment history, amounts owed, length of credit history, new credit, and types of credit used.
If you look at the first two, it is incredibly advantageous to pay your bills on time and keep your amounts owed low. If you have a card with a $8,000 credit line and owe nothing, that will help your score by proving you can pay your bills on time while keeping your credit utilization low.
Myth #5: Annual Fees Are A Complete Waste Of Money
Annual fees can enhance the value a cardholder gets if they use the perks. For example, I pay $550 a year for the American Express Platinum Card. That may seem insane, but if you use the perks, the card can pay for itself. With that $550 I get:
- $200 Annual Travel Credit
- $200 Uber Credits
- $100 Global Entry/TSA PreCheck Credit
- $100 Saks Fifth Avenue Credit
- Access to over 1,200 airport lounges around the world
This doesn’t even include the ability to earn incredibly valuable American Express Membership Rewards points that can transfer to your favorite frequent flyer program.
There is nothing wrong with paying an annual fee, just be sure you are making back that value in points or perks.
Myth #6: If You Aren’t Using That Card, Close It
This one is a bit tricky. If you have a credit card with an annual fee and your annual fee is coming up and you are no longer are interested in using said card, give the credit card company a call to see if they will waive it. If not, it is time to shut it down.
However, if the card has no annual fee, throw it in your sock drawer and let it collect dust. Part of your credit score is based on how much credit you currently have allocated and the length of your credit history.
Take this example from my credit score: I currently have $215,800 in allocated credit lines and my current credit use is ~2%. If I cancel a card with a $15,800 credit line that is five years old, my amount of available credit will go down, and the average age of credit lines will go down as well. That wouldn’t be good for me.
Myth #7: Credit Card Points Are Worthless
If you are spending them on frivolous things like magazine subscriptions, then yes they are worthless. If you can strategically earn credit card points, you can travel for pennies on the dollar. I travel multiple times a year and stay in luxurious hotels because of valuable rewards points.
However, be aware that there is a reason the credit card companies offer rewards – to get you to spend more. You should never spend more money just to earn more points. You are defeating the purpose of the rewards, which is to earn for the spending you are doing anyway.
Myth #8: Having A Lot Of Credit Cards Is Bad For Your Score
There is some validity to this. If you are constantly applying for credit cards, you’ll be bringing a “hard inquiry” on your credit report each time. Each hard inquiry does ding your credit score a few points temporarily. However, you can recover these points by simply paying your bill on time each month.
Also of note, having a new line of credit opened drops the average age of your credit lines which also drops your score.
Credit cards are a great way to build credit. I was able to build my credit throughout college and leave with a great score to qualify for an apartment and car loan all on my own.
Personally, I have been able to “churn” through over 50 credit cards since I turned 18 and earned millions of points and miles, and thousands in cash back along the way. I’m not a high earner or high spender, but simply strategic. I know that I can afford to pay my credit cards in a timely manner and have the self-discipline to control my spending. Now, my credit history is healthy enough where I no longer need assistance from my parents on any purchases.
Brett Holzhauer is a graduate of the Walter Cronkite School of Journalism and Mass Communications at Arizona State University. He enjoys writing about personal finance, travel, and credit card rewards. In his spare time, he enjoys traveling with his wife, eating questionable Mexican food, and watching college football.
Feature Illustration: Laura Caseley For The Money Manual