Some supposed wisdom about credit cards is more like hearsay. And it gets around widely, what with 38.1% of American households carrying credit card debt in 2016. Bad information leads you to pay fees, penalties, and even other people’s debt when it is not necessary. Credit card fiction simply costs you money.
Am I responsible for my mom’s credit card debt?
You probably read stories on the internet about bill collectors calling the adult children of a deceased person to collect credit card debts. Creditors can recover money from an estate for this type of debt. Unless you co-signed for your parent’s credit card, refer any calls on his or her outstanding card debt to the person in charge of settling the estate.
In fact, laws protect family members from contact by third party agencies. The Federal Trade Commission (FTC) notes that a third party can contact you to get the name of name, address, and phone number of an executor or whoever is authorized to pay the estate’s debts . If you receive repeated calls on this matter, contact an agency such as the FTC and file a complaint.
Is There a Downside to Cancelling Credit Cards?
Yes. Cancelling certain credit cards lowers your credit score. Credit bureaus consider factors such as how long you’ve had the account and your balance to available limit. So avoid cancelling cards that you have had for a long time or that have a low balance/high limit.
Some people sign up for a lot of credit cards. They might be trying to get a certain percentage off a particular purchase on a specific day. If you find with a lot of cards, you might be tempted to overspend. Companies such as TransUnion recommend closing accounts with high fees that have not been open for very long if you want to reduce temptation.
If you fear that the number of credit cards is weighing on your credit score, you can pull your own credit report. This type of “soft inquiry” does not hurt your score. Per Experian, the important thing to find out is if the number of revolving accounts (generally credit cards) is listed as a negative factor.
Is There a Benefit to Carrying a Balance?
One study published in 2016 found that more than half of credit card borrowers believed that carrying a balance helped their credit score. This common view is wrong, wrong, wrong. When you carry a balance, you pay interest to the credit card company. You do not improve your credit score.
Many people wonder how credit card companies make money on customers who pay off their balances on time. The credit card companies charge merchants a fee (commonly 2%) every time you use your card to make a purchase. That means every time you use your card at a restaurant or cash station, the issuer gets a cut of the sale even if you pay off your cards each month. What a great business model!
Aren’t Debit Cards Just as Useful?
Many people wonder if they can build a strong credit score by using a debit card. TransUnion has a simple answer: no. A debit card actually functions the same as an old-fashioned check. Since the money comes out of your account, you do not build credit. You build credit when you pay back money loaned to you as agreed.
There are other negative consequences of using debit cards for all purchases. First, TransUnion notes that debit cards are less secure. Second, it is hard to rent a car with a debit card. Because of the risk, rental car companies run a credit check on customers using a debit card to pay. This type of “hard inquiry” lowers your credit score.
If you have no credit history, many issuers offer a secured credit card option. These cards have you make a deposit (say $1,000) and that becomes your credit line. If you charge $100 on your card, you need to pay the $100 back before the due date to avoid interest and fees. The deposit is only tapped in case of a default.
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