Once I started writing about personal finance, I began to notice a trend among people who manage their money well. Even though they don’t necessarily need them, many wealthy people strategically use credit cards.
A 2015 survey done by CreditCards.com revealed that out of 800 wealthy families, three out of five use cash-back credit cards. And 22% use credit cards to take advantage of frequent flier miles.
In comparison, the average American is afraid of using credit cards, and millennials, in particular, are hesitant about using them. And in many ways, this isn’t a big surprise.
Financial experts like Dave Ramsey try to scare Americans off from taking advantage of credit card rewards. And after being saddled with tens of thousands of dollars of student loan debt, it makes sense that millennials would be nervous about adding credit cards into the mix.
The 5 Biggest Credit Card Fears
When it comes to using credit cards, it’s smart to have a certain amount of caution. But most credit card fears are exaggerated, and credit cards can be a useful tool to help you on your financial journey.
Here are the five biggest fears about using credit cards and how you can overcome these obstacles.
1. Damaging your credit score
Many people worry that if they apply for a new credit card, they’ll damage their credit score. That’s because every time you apply for a credit card or loan, the lender runs a hard inquiry on your credit report.
And while a hard inquiry on your credit could cause a slight drop, it won’t cause irrevocable damage to your credit report. The average reduction is about five points, and credit inquiries are dropped off of your credit report after a year.
For many people, the more significant issue is a lack of credit history. Your credit history accounts for 15% of your FICO score, so a lack of credit history could impact your ability to take out a loan or mortgage down the road.
That’s why it’s a good idea to take out a credit card when you don’t really need one and begin building up your credit score and history. This will give you more options down the road.
2. Credit card fraud
According to Lexington Law, many people avoid credit cards because they’re worried about being victims of credit card fraud. In particular, one in three Americans are afraid to use their credit cards for online purchases.
The reality is, you are at higher risk for having your personal information stolen if you use a debit card for online purchases. And there are many ways to keep your credit card information safe while shopping online.
Most credit card companies give you the option to sign up for text alerts, so you’ll know right away about any suspicious purchases or fraudulent activity. And you should only do business with reputable companies that use a PCI-compliant payment processor.
3. Mishandling credit cards
Many Americans avoid credit cards because they are worried about mismanaging them and racking up credit card debt. And in fairness, this is a legitimate concern due to the overwhelming lack of financial education surrounding how cards work and how to use them effectively.
After all, 37% of Americans have revolving credit card debt. But if you pay off your credit cards in full every month, then you don’t have to worry about interest charges or racking up debt.
The problem many people run into is that they rely on their credit cards to cover daily living expenses. And then when the credit card bill arrives at the end of the month, they don’t have enough money to pay it off.
If you find yourself in this situation, then you are going to want to take a good look at your income,spending habits, and budget. Odds are you either need to earn more money, cut down on your spending, or some combination of both.
4. Dealing with nasty creditors
If you have friends or family members who fell behind on their credit card payments, then you’ve probably heard horror stories about harassing phone calls from creditors. And while this is true, it really only happens to people who are seriously delinquent on their accounts and get sent to collections.
If you think you might have a problem paying your credit card bill, contact your credit card company before it becomes a problem. Most credit card issuers are willing to work with you if you’re forthcoming about the situation.
5. Going to jail over credit card debt
And finally, some borrowers have the unfounded fear that if they can’t pay back their credit card debt, they could go to jail. Well, I’m here to assure you that this fear is 100% false.
In the U.S., no one can be sent to jail because they failed to pay off an unsecured credit card. If a creditor ever told you this, they were only trying to scare you.
That being said, there are consequences for failing to repay your credit card debt. Creditors can sue you, and your wages could be garnished. That’s why it’s important only to charge what you’re able to pay back and to always use credit cards responsibly.
Many Americans are nervous about taking out a credit card, and most of these fears are unnecessary. When used responsibly, credit cards can be a fantastic tool that can help you earn cashback rewards, airline miles, and many other perks.
You do need to be careful with credit cards and make sure you’re using them responsibly. Here are a few tips to help you get started:
- Automate your monthly payments, so your bills always get paid on time, and you don’t get stuck with late fees.
- When you’re looking to open a new card, look for cards with a 0% introductory APR. It’s still a good idea to pay off your balance in full every month because this offer will expire at some point.
- Save a six-month emergency fund, so you don’t have to rely on your credit cards if a financial emergency arises.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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