Grant Baldwin’s Blog

This was from a good article on Yahoo recently about 7 Credit Myths that exist in our economy.  Here is a list of the 7 myths as well as my commentary…

1. Writing ‘See ID’ on the signature line on the back of your cards will stop someone else from using your card – Clerks, restaurant servers, and cashiers used to be monsters on checking IDs when this was first an issue several years ago.  The key phrase: “used to be.”  Think about this in your own world.  When was the last time someone checked your ID?  I couldn’t tell you the last time it happened to me.  And they probably wouldn’t check the ID of someone who stole your card either.
2. There’s no credit limit on your American Express, so you can buy anything you want – Survey says…WRONG!  If you have an American Express card, you are allowed spending up to a certain limit based on a variety of factors including spending patterns, credit history, etc.  Basically, if your application says you make $35,000 a year and you just charged $5,000 for new clothes, they are going to be a little concerned and call to talk to you.
3. You need one of each of the big cards – Visa, Mastercard, Discover – because you may get stuck someplace that accepts one and not the other – Let’s be realistic…99% of the places you and I shop at are going to accept any three of these options.  By carrying around all 3 just for that 1% of the time, you are further complicating things financially by having an extra set of cards to keep up with. 
4. You can give your credit score a boost by paying more than you owe – Why would you even want to?  If you are looking to give extra money to your credit card company, then just give it to me instead!  Although it technically does give your credit score a slight boost, it is a temporary and artificial boost, so it really doesn’t provide you any long term value. 
5. Using your debit card wisely can help your credit score – Although a debit card and a credit card look identical, they act completely different when it comes to your credit score.  A credit score is based on debt, so because using your debit card doesn’t incur any debt, it wouldn’t affect your credit score in any way. 
6. Retailers can set a minimum amount you can charge on a credit card when you buy something from them – You’ve probably seen signs like this at gas stations or small convenience stores: “$5 minimum for credit card purchases.”  The reason for this is because every time a business accepts your debit or credit card, the credit card company charges them a fee for that service.  So if you charge a $.50 Snickers to your credit card, they may actually be losing money on that transaction after their fees are paid.  In order to make it worth their while, they put signs up like this one.  But technically, they are not allowed to do that.  They have to accept any amount including a charge for 1 cent.  My take…if you are charging a $.50 Snickers on your credit card, you’ve got bigger financial issues to deal with!
7. If you go over your credit limit and pay it back before the due date, you’ll be fine – Nobody wants their card to be declined because of “insufficient funds,” so if you’re over the limit by a few bucks, most credit card companies will go ahead and authorize the purchase.  However, you’ve created two problems for yourself when you go over your limit: 1) you’ve given them a reason to jack up your interest rate, sometimes to over 30% and 2) they will drill you with a “gotcha” fee that will probably be in the neighborhood of $30.  Is your over-the-limit purchase really worth that? 

People have very mixed feelings when it comes to the subject of credit cards.

Some people love them.  Some people claim they can’t live without them.  And of course you have everyone in between these two extremes.

That would be where I would land.

Two years ago my wife and I began a journey to become debt free and credit card debt was a large part of that problem.  When we first got married, we had a credit card for “emergencies” but then found ourselves using it in other situations.  We justified this because we were consistently paying it off each month.  Eventually, we even started an online business that was completely, 100% funded by credit cards.  We would buy our products at wholesale, sell them online, and use the money to pay off the purchase of the product.

But happens when you lose money on the sale?  This began to happen and before long, we ended up with several thousand dollars of credit card debt.

Today, we’ve made dramatic changes in how we handle our money.  No longer do we depend on credit cards for emergencies…that’s why we have an emergency fund (thus the name) in the form of a savings account.

We have one credit card that I use for business travel expenses and pay off monthly.  I use this to book flights, car rentals, hotel rooms, etc.

So while I don’t love credit cards, I wouldn’t say I completely hate them either.  Having said that, if you ARE going to have a credit card, follow these rules…

1. Pay It Off Every Month – Don’t get a credit card with the idea that you’ll just make the minimum payments and think you’re getting free money.  You’re a moron.  If you can’t afford to pay it off every month, then keep reading.
2. The First Month You Can’t Pay It Off, Cut It Up - You remember growing up how your parents would increase your privileges as you proved you could handle them?  A credit card is a privilege.  The first time you can’t pay it off, you’ve shown that you can’t handle it, and you need to shred it.  It doesn’t mean that you can’t ever have that “privilege” back, but at this point in your life, it won’t work for you. 
3. Keep A Low Credit Limit - Just because you’re approved for a credit limit of $5,000 doesn’t mean you should spend that amount.  By having a lower credit limit, you will be less likely to spend more than you should.
4. Get Rewards Or Cash Back – If you are going to use a credit card, at least get something out of the deal.  There are plenty of cards today that offer various types of rewards or cash back bonuses.  Because of how much I travel, I use a card that earns airline miles, which is valuable to me.
5. Be Responsible – We all know people that have a credit card that shouldn’t.  If you lack self-control when you possess that piece of plastic, you don’t need a credit card.  If you charge stupid purchases on your card with the idea that you’ll figure out some way to pay for it later, you’re not ready for a credit card.  Grow up first and then maybe you’ll be ready.
6. Don’t Become Dependent – Having a credit card is kind of like drinking.  I personally don’t drink, but I don’t have a problem if someone has a beer or a glass of wine.  But if they start drinking a beer with breakfast, I’ve got a problem with that.  If you start using your credit card to buy a $.75 pack of M&M’s from Wal-Mart, you may need to reevaluate some things.
7. Be Choosey About What You Charge – Before you get a credit card, create some boundaries for how you will use it.  Will it be used for only groceries or gas?  What about just for budgeted purchases?  What about only for purchases less than $100?  What are the ground rules for how you will use your card?

What would your advice be?  What would you add to the list?  Agree or disagree with any of these items?