Debunking 3 Myths About Credit Cards

With consumer credit card debt reaching historic levels, it’s clear that this is a symptom of a more significant problem. Behaviors and false beliefs have started to surround credit cards, rendering them an aid to the issue of inflation as more dollars appear from their interest rates. 

As of the end of November 2022, the consumer debt index sat around $925 Billion. Yep, that’s a billion with a “B!” What’s more, we suspect that number will rise much higher when we receive the December 2022 readings. That might put consumer debt above the all-time high of $927 Billion. 

This is something we need to address. Whether you are facing debt or have clients needing advice, here are 3 myths that need to be dispelled.

Myth #1 Credit Cards are Designed to Help You Win 

I liken credit card companies to slot machines at a casino. Those machines don’t make money when you win; they make money when you lose. The more you put in hopes of winning, the more money the machine makes. 

Credit card companies exist solely to make money on your behalf. They are big machines that want you to spend more than you have so you can accrue interest that profits them. 

Credit card companies have a subtle way of keeping you in debt. They do it through minimum payments. While the idea of paying off little by little sounds promising, it’s designed to keep you in debt by compounding the interest based on the money you haven’t paid. 

Myth #2 Paying Above the Minimum Monthly Payment Will Aid in Paying Off Your Debt

It’s natural to think, “If I pay above the minimum monthly payment, it will put me in the good graces of the credit card company, work my debt down,  and raise my credit score!” Unfortunately, that’s just not how these things were designed. 

If you have a minimum monthly payment of $50 and choose one month to pay $100, all you’ve done is spend a little more that month. This doesn’t help you because of the daily compounding interest accrued on your outstanding balance. Let’s say you have a 19.6% interest rate, but if you multiply the daily periodic rates compounding, you are well over the 20s. 

The best way to pay off debt is to start with the card with the lowest outstanding balance and then steadily increase to the next one as you pay them off. You do that until all your debt is paid off. But doubling payments will not do anything to pay down your credit cards. 

Myth #3 Just Paying Off Your Full Balance Every Month will Not Improve Your Credit Score

So by now, you may be thinking, “Well, if I just pay off my full balance at the end of the month, there’s no issue.” Unfortunately, this is only half correct. 

Yes, paying off your debt monthly to avoid compounding interest is good, BUT if you’re still running your credit card to its max limit each month, you aren’t doing any benefits to your credit score. 

The easiest solution here is not to run the limit. But not everyone is in the position to do that. For example, if it’s a company credit card and it's handling expenses, this might be hard to do. 

The next best course of action, in that case, is to pay the debt off before the billing cycle. If you do this, you’ll see an improve your credit score in no less than 60 days. 

Final Thoughts

It’s not a crime to be in debt. Most Americans have faced it at some point. The thing is, so many of these details get missed, and it ends up trapping a lot of people in debt cycles. 

While credit cards can be finicky and designed to profit from your debt, if they’re used wisely, they can become a tool and even an asset to you. 

Be sure to tune into the episode to find out more ways to avoid and get out of debt and the benefits of credit cards if you maximize their potential.