Community Manager
Community Manager
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4 Comments (4 New)

In my 15 years as a financial professional, I’ve heard a lot of opinions about credit cards. From the good, the bad, to the ugly, their worth can be hotly contested. The truth is, it all comes down to how they’re used. Here are five common myths about credit cards — and what you need to know to make the right choice between cash, credit and debit.

 

Credit Card Image.jpg

1. Credit cards are evil. Contrary to popular belief or what any celebrity financial “guru” might say, credit cards are not evil; they’re plastic. Credit cards are a financial instrument, and when used responsibly, they can be very beneficial. Responsible use means limiting your spending to an amount you can afford to repay in full each billing cycle — or at least within a relatively short time period. Treat the plastic as cash, and it’ll help you stay out of credit card debt.

 

  1. You should always use cash or a debit card instead of a credit card. If you are unable to limit your credit card spending, you might be better off using cash or a debit card to keep from accruing lots of debt. Having said that, credit cards often have more advantages than cash or debit cards. The type and number of these advantages depends on the card issuer, but could include identify theft protection, extended warranties, trip insurance, or rewards. Credit cards can also help youbuild credit when used responsibly. In general, when you use your credit card, the card issuer reports your payment history and balance to the credit reporting bureaus.  Having a history of on-time payments and responsible credit card use — such as keeping a low balance — could pay dividends when you attempt to apply for a home or auto loan, rent an apartment or apply for certain employment opportunities.  

 

Find the card that’s right for you.

USAA’s mission is to facilitate the financial security of its members. USAA Bank offers credit cards with great rewards and competitive interest rates.

  1. Credit cards and charge cards are the same thing. Credit cards and charge cards are not the same thing. A credit card typically allows you to charge up to a certain preset spending limit and repay over time, with interest. A charge card, on the other hand, typically does not have a preset spending limit but must be repaid in full each month. The right card for you depends on your credit score, preferences, rewards programs, spending and repayment habits and card availability, as there are a lot more credit card issuers than charge card issuers.

 

  1. The higher the rewards rate, the better the credit card. Maybe, maybe not. This often comes down to how you use the card. For example, a credit card may advertise 5% cash back, but when you look at the fine print, you’ll notice the 5% is limited to select purchases — or even rotating purchases — and during a certain time period. There might even be a cap on the reward amount so that you get 5% cash back up to a certain amount and 1% after that. If the 5% offers are for purchases you frequently make, then great. If not, you might be better off with a card that offers, for example, an unlimited 1.5% cash back on all purchases. You may also have to pay an annual fee for certain rewards cards. If you carry a balance instead of paying the card in full every month, the APR should be a major consideration, as you are likely paying much more in interest than you are earning in rewards. In this case, you might want to consider cards with a lower APR versus higher rewards.

 

  1. You have to carry over a credit card balance to build credit. This has to be one of the most common myths I hear. Based on my experience, it’s simply not true. I pay off my credit cards in full every month, have excellent credit and have never paid a penny in credit card interest. It is true that having a history of activity on your credit card can be helpful in building credit, but you do not have to carry over a balance and pay unnecessary interest to build credit. When your billing cycle ends each month, the card issuer will typically report the balance and any payments since last reporting to the credit reporting bureaus. Go ahead and pay your balance in full before the bill is due, and you will avoid paying interest and reap the benefits in your credit score.

 

At the end of the day, YOU ultimately determine what is good or bad when it comes to credit cards. Smart financial choices have the power to turn a piece of plastic into a powerful financial instrument.

 

Have a question or additional credit card myth to bust? Leave a comment below.

 

256965 – 1218

 

Subject to credit approval.

 

This credit card is issued by USAA Savings Bank, Member FDIC.

4 Comments
Razor Burn
New Member



Very helpful information...  THANK YOU! 

I won''t lie, I am guilty of thinking it was necessary to carry at least a small balance each month in order to better build credit history more quickly.  (notice I said small).  

I don't know if you will be able to reply to this, but if so perhaps you can offer some guidance as to rather or not my strategy is a good one, or if I am simply doing it all wrong, lol....

I have been working aggressivley for ALMOST 4 years now to build & repair my credit profile.  I suppose this is the last area of life that I "grew up" in, so to speak.  I never really desired credit before as I was able to just pay cash for whatever I wanted and simply did not need the credit.  -  Until the day came when I realized that sometimes cash simply isn't ebough, and that my credit score is just as much an indicator of the type of man that I am as my integrity itself.  So, I decided one day to simply roll up my sleeves and get to work on my credit profile.

I started with a secured card and a secured loan through my bank (it was all I could get).   Over the next year I used the card and made monthly automated "minimum due" payments on the secured loan.  After the loan was paid off I repeated the loan one more time the second year, and paid it off in the same manner.  By the end of the second year having paid off 2 loans and acquiring a 100% payment record on the secured card, I suddenly started getting offered & approved for reeal credit cards almost anywhere.

Now my strategy is so intentionally use a few of my cards each month, sometimes very small purchases such as lunch for the office staff and sometimes large purchases such as an auto repair.  But regardless of rather I have spent $50 or $800 in a single month, I always make sure to pay-off rather large chunks of the amount charged before the billing cycle ends, or at least within 2 months.  I do leave a minimal balance on the cards ($100 - $300) and make regular monthly payments that I set on autopay.  But even those auto payments are always set to be above the minium payment due so that I can still pay that off more quickly while saving money on interest.

So far this seems to have served me well, or so I think.  But If there is a better way to build a better credit score - in a much shorter amount of time, then I by all means am willing to listen and to apply such a strategy.  But I will admit, I do get VERY VERY nervous about paying my account off too quickly and making large payments as I have TRULY read hundreds of horror stories of other people that claims to be doing the same strategy as myself, and their crtedit card company swoops in and lowers their credit line on them.  This terrifies me, I won't lie!   I do NOT want this to happen to me, so I'm always reading online articles to see if there is some magical algorthym I could employ to prevent such a travesty.


If you (the author of the article) happens to see this and is willing to reply, I would sincerely be very appreciative of your time and any advice you would be willing to share.

Thank you in advance,
~  Me

 

Twitterpayed
New Member

Have $7000 debt at 6.5% interest with another bank, good income, and an excellent credit score.

Although, I am unable to pay it off completely now, making $2000 payment will be done next week driving the loan to $5000.

I received USAA offer of 0% interest for 15 months on balance transfers with blank checks.  The fee is 3% and this would be $150.  I typically pay full credit card balances each month and as a rule, never maintain any credit card debt.  

However, I am thinking that I could write one of these checks, pay the $150, and be done with the loan interest.  What concerns me is a single statement in the letter from USAA: "If you transfer a balance or write a convenience check with this offer, all purchases will be charged interest until you pay the entire balance in full, including any transferred/convenience check balances".  This seems to contradict every other statement in the letter.

What is the wisest financial decision here?

(a) Keep the loan with 6.5% interest and attempt to pay it off at about $1000 per month (this is what I can afford - but it would take 5 more months to pay it off

(b) Transfer the loan to the USAA card, continue to pay for monthly purchases that typically go on the card as well as about $500 toward the loan

(c) Suggestions?

 

Thanks

Twitterpayed

Community Manager
Community Manager

Twitterpaid,

 

Thanks for the question!  I first want to refer you to call in to 1-800-531-USAA and speak to one of our credit card specialists regarding your specific credit card offer, regardless of the decision you make with the outside loan.  It’s important to know how and when interest applies on your purchases, convenience checks, and any balance transfers.

Regarding the outside debt, I want to lean you toward option (a), simply paying off the loan as is.  The great news is that you are paying 1,000 per month, getting rid of the debt quickly and making the math pretty easy.  I’m going to use simple interest to estimate the cost if you just pay it off.  This debt you have may compound the interest differently, but let’s assume it’s done monthly to get close.  6.5% interest loan with a 5,000 balance, paid off 1,000 per month, will accrue interest somewhere around $81.  Take 6.5% annual interest rate divided by 12 to get a monthly rate of 0.54%, then multiply that by the decreasing balances of 5000, 4000, 3000, 2000, and 1000.  Add those monthly interest charges and you are close to the actual cost.

Option A’s expense of around $81 compared to option (b)’s  balance transfer of $150 makes it a potentially more economical route to go.  Balance transfers CAN help out when it’s going to take a long time to pay down the debt, so if you don’t pay the $1000 per month you intended that might change the situation.

You didn’t mention anything about your wider financial picture, but it’s important you have at least $1000 in an emergency savings before aggressively paying off the debt.  Also, I encourage you to make a plan for that $1000 per month of extra cash flow once the debt is paid off.  Some good options are paying off any other high interest debts you might have, achieve an emergency savings of 3 to 6 months of living expenses, or even possibly save and invest for other long term goals.  I hope this helps!

Been There - Done It
Occasional Visitor
Based on years of earning, spending and saving money for life's "hiccup's", here is another suggestion:

 

1. Accept the USAA card offer. Pay $350 per month each and every month (setup an automatic payment to USAA) and don't use the card again for ANYTHING for 16 months.

 

2.  Pay $650 per month each and every month (setup an automatic payment to USAA) and have this payment go to your SAVINGS account.

 

3. Your total monthly payment: $1000 per month.

 

4. Total Cost: $150 Today Net Cost: $150 -$81 (Old Card Interest/6 Months) = $69

 

Result in 15 Months:

 

1. You will build a strong credit record by paying off two credit cards on-time.

2. You will owe Zero dollars to either credit card company.

3.  You will have approximately $10,000 in savings....a GREAT emergency fund.

4. You may decide to invest $1000 per month in a good, long-term investment account for retirement. Since you will have lived without the money for 15 months already while paying off USAA, pay yourself for your future .   

5. You will be inundated with credit card offers from companies that want your credit business.

 

Your question was excellent. It's good to get a handle on basic financial issues when you are young and have the advantage of years to put your money to work for you. Invested correctly, your money will work 24/7 and never need a vacation (or even a day off).      

 

Good Luck and I wish you a Very Bright future.

 

Sincerely,

 

Been There - Done It