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Myths About Credit Cards and Debt

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As with anything else, credit cards can also have a bad reputation

Everyone is an expert on one thing or another, and what seems to stand out in my research on this subject is that most credit card experts have never worked for a credit card company. Even those individuals who seem vague. As for myself, I do not claim to be an expert in this field. What you will read here is a summary 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 cover a question about debt and credit cards. In my research, the prevailing research eludes credit cards rewarding debt. The definitive answer is an emphatic ‘sort of’. It’s the exact opposite and the reasons seem logical. The rewards that one can receive with low or no debt is a wider acceptance for more credit meaning it is easier to get a personal loan from their local bank. Interest rates also get lower due to the fact or assumption that they pay their bills on time, keeping credit cards with zero balance, thus avoiding the creation of bad debt.

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

Some debts are good

Sometimes it is unavoidable to have a certain amount of debt. However, credit card companies reward those individuals with a credit score near the high end of the spectrum, somewhere between 650 and 850, with lower rates and higher limits on their accounts. The full range of the typical credit score is from 300 to 850 points, with up to 31% of this number coming from the amount of debt a person has. The more debt a person incurs, the lower their score will be.

In many cases, a person’s debt stems from credit cards, which are voluntary, indicating that the person has applied and has been accepted as a tangible credit risk because of their current score. Notice I said score, not rating. Ratings are for things like mortgage-backed securities or corporate bonds, not “Joe consumer.” Credit scores are what the consumer gets through a credit report, which lists the creditors, personal information, questions and collection items, all related to loans and outstanding amounts.

Debt Maintenance

Of course, the best way to avoid debt is to pay everything upfront and in cash. Unfortunately, few of us have this ability. With this in mind, when working with a credit card, we must keep in mind that it is important to pay it in full at every opportunity. This helps avoid unnecessary interest charges, which arise from minimal or missed payments. Again, this is an example of bad debt where missed payments occur and only the minimum is paid. This will only hurt one’s credit in the long run.

In the case of dealing with home loans and car loans, paying a few dollars more per month adds up and can reduce the amount of interest on those loans. Face it, a big part of a mortgage payment is interest-based. The same goes for a car loan. Of course, at this point the premise around credit cards rewarding debt is resolved. The credit card companies reward relatively lower debt and punish the relatively higher debt. That said, lower to almost no debt means better/lower interest rates with a higher chance of accepting personal loans. Where it is completely the opposite in cases where a higher level of debt occurs.

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