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Credit cards get plenty of bad press. Scan the web and you’ll find countless stories of consumers who’ve run up thousands of dollars of high-interest rate debt, fallen behind on their monthly payments, and destroyed their credit scores.
But credit cards, if used responsibly, are important financial tools. They’re safer than cash. They can actually help you build your credit score. They often come with valuable rewards programs. And you won’t have to worry about those high interest rates if you’re disciplined enough to charge only what you can afford to pay back each month.
Are unfounded fears keeping you from using credit cards? If so, it’s time to stop. Here are five credit card fears that have been overblown, and the truths that debunk them.
1. Credit Cards Will Ruin My Credit Score
True, lenders rely on your FICO (and other) credit scores to determine if you qualify for loans. They also use these scores to set the interest rates attached to your loans. Credit scores are important. It’s natural for consumers to worry that charging too much will send their scores plummeting. But the truth is, using credit cards responsibly will actually boost your credit score.
Every time you pay your credit card bill on time, you are helping your credit score. According to myFICO.com, 35% of your credit score is made up of your payment history. Establish a history of paying your bills on time, and you’ll be on your way to building a good credit score. Just be careful to not carry a large balance on your card each month. First, you’ll pay too much in interest. Secondly, using too much of your available credit will hurt your credit score.
2. I’ll Pay a Ton in Interest
It’s true that if you misuse your credit card, you will pay plenty in interest. It’s not unusual for credit cards to come with interest rates of 19% or higher. If you carry a large balance each month, your interest charges will skyrocket. But again, if you use your credit card wisely, you’ll have nothing to fear from high interest rates. (See also: Best Low Interest Rate Credit Cards)
Credit cards work best for people who pay off their balances in full each month. If you do this, your credit card’s interest rate won’t matter because you won’t ever pay interest on your debt. You only pay interest when you don’t pay off your balance in full with every statement. If you do find yourself carrying an ever-growing balance each month, though, it’s time to stop using your card and focus on paying down that debt.
3. Someone Will Steal My Card and Run Up Tons of Debt
It’s true that thieves can steal your credit cards. They might also steal your card’s information and use it to make online purchases. But credit cards are actually safer than cash.
Consumers, if they report their card stolen or lost in a timely fashion, aren’t responsible for unauthorized charges on their credit cards. If someone steals your card and charges thousands of dollars, you can dispute the illegal purchases and your credit card company won’t charge you for them. Under federal law, you won’t be responsible for any fraudulent charges if you report your card stolen or lost before any charges are made on it. If you report your card stolen or lost within two business days and charges have already been made, you are only responsible for a maximum of $50 worth of those fraudulent purchases, though most credit card providers will waive even that.
Compare that to cash: If someone steals $100 from your wallet, that money is likely gone forever.
4. Applying for Credit Cards Will Hurt My Credit Score
Your credit score will take a small hit when you apply for new credit. That’s because whenever you apply for a new credit card, what is known as a hard inquiry is added to your three credit reports. A hard inquiry hurts your score because every time you take on a new line of credit, you are exposing yourself to the possibility of running up debt that you can’t afford. But the reality is, the damage from applying for credit cards prudently, is minimal.
If you apply for a single credit card, that hard inquiry will typically drop your FICO credit score by about five points. That’s not much, and it won’t take long for that small dip to disappear. Keep paying your bills on time and don’t run up credit card debt, and that five-point loss will evaporate. But if you apply for, say, six credit cards at the same time? That can cause a bigger drop in your credit scores. So apply prudently: Don’t fill out more than one credit card application at a time.
5. I’m Worried That I’ll End Up in Jail if I Can’t Pay
There is no such thing as debtor’s prison in the United States. Even so, consumers might fear that if they can’t pay their credit card bills, they’ll end up in jail. This simply isn’t true.
The only way credit card debt can send you to jail is if you willingly commit fraud. Otherwise, no matter how much you owe, you won’t spend time behind bars. No matter what creditors say, you can’t be jailed for credit card debt. That doesn’t mean, however, that you won’t face consequences if you can’t pay your credit card bills. For instance, your credit card company might be able to garnish your wages as a way to force you to pay up.
Do you harbor any of these — or other — credit card fears?