Money Managing: Seven Myths About Credit Card Debt
Monday, October 20, 2014, 1:00 AM | Leave Comment
American consumer credit card debt is $800 billion, larger than the GDP of Greece, Pakistan, and Egypt combined. It is huge, it is frightening, and it is completely beatable. Yet credit card debt is shrouded in myth and misconception.
These seven myths peel away the layers of fiction to reveal the facts about how you can beat your debt.
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I only need to pay my minimum balance to avoid interest
Prior to 2003, devilish credit card companies used minimum balances to entrap customers in a cycle of negative amortization. In 2003, federal regulators put a stop to such sleazy shenanigans. Now, if you consistently pay your minimum, which is usually 1-2 percent of the total balance, you will pay off your debt eventually, but the remaining balance will always accrue interest.
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High credit limits are dangerous
High credit limits are only perilous in the hands of the unskilled. Approximately 30 percent of your FICO credit score is based on your debt-to-credit ratio. Having a lot of credit with a small outstanding balance is something to brag about. However, high credit limits can be lethal when maxed out, and that includes “premium” credit cards with undisclosed spending limits, which once maxed out will demand their pound of flesh, 23 percent interest or more!
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Fixed interest rates will not change
Interest rates may fluctuate if you withdraw cash from your account. Fixed account interest rates also do not prevent penalty interest rates, which can range as high as 30 percent.
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I should carry a credit card balance to improve my credit score
False! Credit scores look at quantity of credit accounts, utilization ratios, and payment schedules rather than unpaid balances.
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I should use credit cards from my preferred retailers
This myth is psychological, rather than mathematical. A disciplined financier can reap rewards from commercial credit cards, but impulse buyers often succumb to this shopping Siren of a percentage or two off a purchase.
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Closing old credit accounts will harm my credit score
The age of the account is of no importance. Rather, what counts is your debt-to-credit ratio. Closing an old account may lower your credit while holding your debt constant, which bumps up your ratio. However, you should close an account if it has sky-high interest rates or you hate temptation.
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I can settle my credit card debt and save my credit score
Debt settlement is a privilege often only extended for hardships like unemployment, illness, divorce, etc. Even those who succeed will have scarred credit scores. Other people can seek forbearance or bankruptcy, but according to Exelby & Partners Ltd, the best solution to debt is to pay it.
Debt can be scary, but it doesn’t have to keep you from doing something about it. Don’t believe every myth you hear. Check the facts and talk to professionals who can help you look for ways out without going to any drastic measures.
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