Misconceptions about Credit Cards

[MortgageQueen]

People have all kinds of misconceptions about credit cards that end up biting them in the butt. If you’re going to use any tool to your advantage, you’ve got to read the instruction manual first. You wouldn’t start up a chain saw without having a look at the safety warnings would you? So you shouldn’t be so willing to whip out that credit card without looking at the safety rules first.

Most credit cards come with a grace period that’s somewhere around 21 days. But that only applies if you pay your balance in full. Leave so much as a one-dollar balance and you’ll be charged interest on all your purchases back to the day they were made or posted.

Low-interest cards are another carrot. But if you don’t make at least your minimum payment within 30 days of your due date, you’ll watch your rate sky-rocket. It can take eons to get that great rate back, if you ever do.

Payments aren’t always applied in the order of your purchases. While you may have bought those shoes before you took that cash advance, there are different rules for different types of transactions. You’ll have to get out your magnifying glass and read the mouse print to see how your card distributes your payments.

Promotional rates don’t last forever. As soon as the promotion period expires, your card will revert to its usually much higher rate. A 1.7% rate may look good now, but if you’re going to end up paying 24.99% later, that balance transfer may not be such a good idea. If you’re being offered a special rate, make sure you mark the expiry date on your calendar–and have the balance paid off–before the big guns come out.

Perhaps the biggest myth that will end up hurting you is the belief that your credit limit reflects what you can afford to spend. There is no co-relation between how much you can afford and how much the credit card company will offer you. Regardless of the limit you are given, it is up to you to spend only as much as you can afford to repay. And the best way to know that? Already have the money in the bank before you whip out your credit card to pay. Failing that, you’re revving up that chain saw without your safety gear on.

[nainai0585]

Is this a myth of a fact: I contacted my credit card company about a discrepency in my online statement, then the topic of increasing my limit came up. The woman from the company informed me that they contact/credit score company (not sure what they are actually called) finds out what my current balance is and how much credit I still have available on my card, then determines my overall credit score based on those numbers. The woman told me that the more credit I have available, the higher my credit score will be. Is this true?

[MortgageQueen]

Absolutely NOT. If you have too much credit available to you, it will bring your score down! I just had a client last month that had several credit cards and really no bad history at all (he paid everything on time) but his credit score was actually sub-par because of all the "credit" he had available to him.
Everyone needs to keep in mind when you use a credit card "special" such as buying furniture, electronics, even a car. . .even after the balance is paid, that credit is still listed on your bureau. SO if, you're not going to use it, cancel it!

[MortgageMaster]

Absolutely NOT. If you have too much credit available to you, it will bring your score down! I just had a client last month that had several credit cards and really no bad history at all (he paid everything on time) but his credit score was actually sub-par because of all the "credit" he had available to him.
Everyone needs to keep in mind when you use a credit card "special" such as buying furniture, electronics, even a car. . .even after the balance is paid, that credit is still listed on your bureau. SO if, you're not going to use it, cancel it!

Was he carrying a balance on any or all of them? What was his credit utilization like?

[MortgageQueen]

No, He was not carrying a balance on them. That's why he needed to get rid of them. He actively used 3 trades and that was it.

[Shwa Girl]

Thanks for this thread. Very important topic.
I think another myth a friend told me is that she pays for everything with a specific credit card to get the most points. The myth is that points are a great thing.
The truth is that paying with cash gives you more money in your bank account at the end of the year. Using a plastic card is not "real" to some people, so they use if freely. Using cash money (paper bills, coins) is real to some people, and can help them curb their spending.

[marmaduke]

[QUOTE=Shwa Girl; The myth is that points are a great thing. [/QUOTE]

That's NOT a myth. Points are great. They save me a lot of money.

People who can't handle credit cards are the problem.

[maggiespice]

We are told by many experts that you never cancel unused CC's. This is what hurts your credit score by opening and closing CC all the time. Don't they also have something like debt to credit ratio as well to help determine what your score will be?

[y2ktrent]

Absolutely NOT. If you have too much credit available to you, it will bring your score down! I just had a client last month that had several credit cards and really no bad history at all (he paid everything on time) but his credit score was actually sub-par because of all the "credit" he had available to him.

Too much available credit does NOT negatively affect ones credit score.

[y2ktrent]

he truth is that paying with cash gives you more money in your bank account at the end of the year.

Not for me I have gained $500+ this year by using credit cards.

[walkonby]

I am now very confused about what I have been reading here about credit cards and their impact on ones credit score??

ok, so if you have some credit cards that you hardly ever use anymore and you lowered the credit limits on them to a mere $500-$1000 and say they are dept store types with laughable high interest rates? How do THOSE types of CC's effect your credit score if you purchase something on them say 3 times in a year?

Then you have a few favourite credit cards that give you rewards ( Amex-AirMiles, MC-PC grocery points and MC-PetroPoints) and those ones are used for all expenses purchased for the month, ( NONE of these CC are maxed out during the month ever ) and then each CC is paid off in full each month before the required due date. How do those cards affect your credit score? Or rather how do the way they are used each month affect the credit score, if at all?.

MortgageQueen?? I need you

[nainai0585]

Now I am a little more confused with the different answers I have received. I'm not sure if this makes any difference with my post #2, I forgot to state that I only have a secured MC that I had to pay into in order to get after claiming bankruptcy 5 yrs ago. I've had this card for 3 yrs now. Its the ONLY debt I have, thankfully. I am nowhere near my credit limit as I set myself a credit max I can financially handle. The main reason why I increased my limit even though I never intended to get anywhere near it, was based on what the woman at the company told me. I know that my score is fairly good and I would hate for it to be lowered just b/c I followed the wrong advice.
Maybe a call back to the credit card company might clear up a few things for me as well.

[MortgageQueen]

I am now very confused about what I have been reading here about credit cards and their impact on ones credit score??

ok, so if you have some credit cards that you hardly ever use anymore and you lowered the credit limits on them to a mere $500-$1000 and say they are dept store types with laughable high interest rates? How do THOSE types of CC's effect your credit score if you purchase something on them say 3 times in a year?

Then you have a few favourite credit cards that give you rewards ( Amex-AirMiles, MC-PC grocery points and MC-PetroPoints) and those ones are used for all expenses purchased for the month, ( NONE of these CC are maxed out during the month ever ) and then each CC is paid off in full each month before the required due date. How do those cards affect your credit score? Or rather how do the way they are used each month affect the credit score, if at all?.

MortgageQueen?? I need you

Not to fear Walkonby. . . if you keep the seldom used cards at a low limit and are actually still using them. . even occasionally. . . that should NOT affect your credit rating adversely. (as long as you pay them on time, of course)
As for the rest of your cards, you are picture perfect in a creditors eyes. Keep on doin' what your doin' kiddo!

[MortgageQueen]

Too much available credit does NOT negatively affect ones credit score.

Ummmmm. . ..would you like to expand on why you feel this way? . . Because I read and advise people on their credit bureaus everyday. . . and I'm quite sure it does indeed affect their score.

[MortgageQueen]

We are told by many experts that you never cancel unused CC's. This is what hurts your credit score by opening and closing CC all the time. Don't they also have something like debt to credit ratio as well to help determine what your score will be?

As I mentioned in my earlier example Maggie, one of my clients made an excellent income, paid all his cards (the ones he used) on time, but still had a sub-par credit score. Why? It said so right at the top of the credit report . . "available credit too high"

The advice from experts you might be thinking of is perhaps not to cancel the only cards you have even if you're not using them. That would be completely different scenario. As much as it's wise to stay away from using credit. . . the system is set up in such a way that if you DON'T use credit. . . potential creditors have nothing to judge your credit behavior by. . . .therefore you will likely have at the very least an "incomplete history" or not enough active credit usage to make you worthy of extending credit to you in their estimation. .