4 Misconceptions About Credit Card Debt

1. You only need to pay the minimum each month. Your credit-card bill will show the total amount you owe and a minimum payment, typically about 4% of your bill. Paying at least the minimum payment by the due date keeps you current and helps your credit score, a key way lenders grade your financial behavior.

However, if you pay only the minimum, you’ll still pay interest on the whole balance that you owe, at interest rates that are among the highest in the financial world. Your bill must show how long it will take to pay off your debt if you make only the minimum payment each month—and that’s usually a frightening amount of time. In reality, the minimum payment is something of a ruse, essentially an enticement to get you to pay just enough to keep current while also running up high interest charges. As you accumulate interest charges, your interest will actually begin to compound not just on what you owe, but also on your interest payments. In other words, you will be paying interest on interest. If you cannot pay the entire bill each month, pay as much as you possibly can.

2. Your credit limit reflects what you can afford. In reality, your credit limit has no relation to what you can afford, or how much you should spend.

The credit-card company has looked at your record of paying your bills and your other accounts and decided how much it is willing to loan you at one-time. It doesn’t have a clue if you really can pay off that much debt because it doesn’t know how much income you have right now or your net worth.

You may be tempted to see a credit limit of $10,000 or more as a license to spend. But likely, that decision will put you in a financial hole, and maxing out your debt will hurt your credit score.

3. The interest rate will stay the same over time. This isn’t likely. The Credit Card Act of 2009 restricted how credit-card companies can raise fixed interest rates. In response, most companies that offered fixed interest rates changed them to variable rates; those variable rates will go up when other interest rates go up.

In addition, you will pay different interest rates on different kinds of borrowing. If you use your card to get cash, something you should do only in a true emergency,you may pay an annual interest rate above 20%, probably far more than what you pay for regular purchases.

If you are late making a payment or ifyour check bounces, your interest rate for new purchases can spike up to around 30%, and that rate can continue indefinitely.

4. The interest rate is the only charge that I’ll see. No such chance. Credit-card companies will hit you up with all kinds of additional charges when you make a mistake. Did you make a payment after the due date or miss one altogether? You’ll be assessed a late fee of as much as $35.

Transferring a balance from one card to another? You’ll pay a fee of up to 5% of the balance. Using your credit card instead of your debit card to get cash? You’ll pay another fee of up to 5% of the amount, or a minimum of $5 or $10. Using your card overseas? Foreign transaction fees of up to 3% of the transaction may be assessed.

In short, the more you rely on the credit card, the more you will pay for the privilege. Using a card that way may make sense in a real pinch, but it’s a terrible habit to get into because the interest rates and fees are so high that it can be hard to dig out once you’re in the hole. You’ll pay more and more just to keep your debt from growing.

On the other hand, if you pay your bill in full every month, the credit card works for you, rather than the other way around.


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