Myths about credit cards and debt
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 topic is that most of the credit card experts have never worked for a credit card company. Even those people who seemed sketchy. As for me, I don’t claim to be an expert on the subject. What you will read here is a summary of the information I have gathered. I will try to make this completely clear and subjective. At the same time, I must point out that there is little objective evidence to support most of the myths that circulate on the Internet.
First, let’s look at the question of debt and credit cards. In my research, the predominant inquiry eludes debt reward credit cards. The final answer is a resounding “Type”. In fact, the opposite is true, and the reasons seem logical. The rewards that one can get with little or no debt are wider acceptance for more credit, which means it’s easier to get a personal loan from your local bank. Interest rates also become lower due to the fact or assumption that they pay their bills on time, keeping all credit cards at zero balance, which avoids creating bad debt.
On the other hand, a person with relatively large debt is penalized with higher interest rates and a limited choice of personal loan resources. The definition of what constitutes bad debt is an arbitrary conclusion that is really determined by the circumstances. Bad debt can be thought of as owing money with a high interest rate associated with the original loan. For example, getting a home loan at 4.5% is not bad debt, nor is buying a car or motorcycle at 7% interest. What would cause bad debt in this scenario is if the car or motorcycle loan goes into default for some reason. At the same time, having many credit accounts open at the same time that hold unpaid balances, with some approaching the limit, is another example of bad debt.
Some debt is good
Carrying a certain level of debt is sometimes unavoidable. However, credit card companies reward individuals who have credit scores near the upper end of the spectrum, anywhere from 650 to 850, with lower rates and higher limits on their accounts. The full range of a typical credit score is 300 to 850 points, with up to 31% of that number coming from the amount of debt a person has. The more debt a person has, the lower their score will be.
In a large proportion of cases, a person’s debt originates from credit cards, which is created through voluntary means, pointing to the fact that the person applied for and was accepted as a tangible credit risk due to their current score. Notice I said score, not grade. Ratings are for things like mortgage-backed securities or corporate bonds, not “Joe Consumer.” Credit scores are what a consumer receives through a credit report that lists creditors, personal information, inquiries and collection items, all related to loans and outstanding amounts.
The best way to avoid debt is obviously to pay anything and everything upfront and in cash. Very few of us have this ability unfortunately. With this in mind, we must consider when dealing with a credit card the importance of paying it off in full at every opportunity. This helps avoid unnecessary interest that accrues due to minimal or missed payments. Again, this is an example of bad debt where you miss payments and only pay the minimum. This will only hurt one’s credit in the long run.
In the case of dealing with home loans and vehicle loans, paying a few dollars more each month adds up and can lower the amount of interest on those loans. Face it, a good portion of your mortgage payment is interest based. It’s the same with a car loan. Naturally, at this point the debate over debt-rewarding credit cards is moot. Credit card companies reward relatively lower debt and penalize relatively higher levels of debt. That being said, lower to almost no debt means better/lower interest rates with a better chance of being accepted for personal loans. Where it is completely the opposite in cases where there is a higher level of debt.
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