• September 29, 2021

Myths about credit cards and debt

Like anything else, credit cards can get a bad rap too

Everyone is an expert at one thing or another, and what seems to stand out from my research on this topic is that most credit card experts have never worked for a credit card company. Even those individuals who have done so seem lazy. As for me, I do not claim to be an expert on the subject. What you will read here is a synopsis of the information I have gathered. I will try to make this perfectly clear and subjective. At the same time, I must point out that there is little objective evidence to support most of the myths circulating on the Internet.

First, let’s tackle a question about debt and credit cards. In my research, the prevailing research sidesteps credit cards that repay debt. The definitive answer is an emphatic “Something of.” In fact, the opposite is true, and the reasons seem logical. The rewards that one can receive with little or no debt are a wider acceptance for more credit, which means that it is easier to obtain a personal loan from your local bank. Interest rates also get lower by the fact or assumption that they pay their bills on time, keeping credit cards with a zero balance, which prevents the creation of a delinquency.

On the other hand, a person with a relatively large debt is penalized with higher interest rates and a limited choice of resources for personal loans. The definition of what a bad debt is is an arbitrary conclusion that is really determined by the circumstances. Bad debts can be considered to owe money with a high interest rate attached to the initial loan. For example, getting a 4.5% home loan is not bad debt, nor is the purchase of a car or motorcycle with a 7% interest rate. What would cause bad debt in this scenario is if the car or motorcycle loan were to default for any reason. At the same time, having many credit accounts open while maintaining unpaid balances and some approaching the limit is another example of bad debt.

Some debt is good

Carrying a certain level of debt is sometimes unavoidable. However, credit card companies reward those with a credit score near the upper end of the spectrum, between 650 and 850, with lower rates and higher limits for their accounts. The full range of the typical credit score is 300 to 850 points, where up to 31% of this number comes from the amount of debt that a person has. The more debt a person takes on, the lower their score.

In a large number of cases, a person’s debt comes from credit cards, which is generated through voluntary means pointing to the fact that the person applied for and was accepted as a tangible credit risk due to their current score. Notice I said score, not grade. The ratings are for things like mortgage securities or corporate bonds that are not “consumer Joe.” Credit scores are what the consumer gets through a credit report, which lists creditors, personal information, inquiries, and collection items, all related to loans and outstanding amounts.

Debt maintenance

The best way to avoid debt is obviously to pay anything up front and in cash. Unfortunately, very few of us have this ability. With this in mind, then, we must consider when working with a credit card, it is the importance of paying it in full at every opportunity. This helps avoid unnecessary interest charges, which were increased due to late or minimum payments. Again, this is an example of bad debt where late payments occur and only the minimum is paid. Doing so will only hurt a person’s credit in the long run.

In the case of dealing with home loans and auto loans, paying a few dollars more each month adds up and can lower the amount of interest on those loans. Face it, a good chunk of a mortgage payment is based on interest. The same goes for a car loan. Naturally, at this point the dispute over credit cards that repay debt has cleared up. Credit card companies reward relatively lower debt and penalize relatively higher debt levels. That said, lower or near zero debt means better / lower interest rates with a higher likelihood of accepting personal loans. Where the opposite occurs in cases where there is a higher level of indebtedness.

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