For those of you who are already familiar with the ins and outs of owning a credit card, some of these misconceptions might seem inconceivable. However, there are things about credit cards that are sometimes misunderstood by those without the full picture or were fed the impression that credit cards are simply debt machine monsters. Let’s try clearing a few things up.
Is a credit card just a debt machine?
One common misconception about credit card users is that they are simply racking up debts and interests on those debts, but this isn’t necessarily true. Check out the following example for a start:
Richie has $5,000 in his bank account and he decided to purchase a $1,000 laptop on his credit card.
When his credit card bill is due, he is able to pay off the $1,000 in full and on time using the money in his bank account.
Since his credit card provides a 2% cashback on all of his purchases, Richie ends up getting back $20 in his credit card account—something he would not get if he purchased the laptop directly using a debit card linked to his bank account.
Many credit cards usually have perks, be it cashback, reward points, airline miles, or hotel stays. Cashbacks will return a percentage of the money you spent back into your pocket. Reward points can often be exchanged for a variety of goods, such as electronic devices, accessories, furniture, the list goes on.
When you are able to pay your credit card balances in full and on time, you will rake in rewards instead of debts.
However, if you do not have sufficient cash to cover an upcoming credit card bill, a credit card can indeed turn into a debt machine.
Let’s say if Richie only has $500 in his bank account and he wants to purchase the same $1,000 laptop using his credit card, it is likely he may not able to pay off the $500 in full or on time when his credit card bill is due. This is now the start of his credit card debt—his unpaid credit card balance after the due date will start accruing interests month after month and he will end up paying more than $1,000 for the laptop eventually as a result.
But wait, don’t all credit card purchases get charged interests?
One thing that sometimes scares people off from getting credit cards is because they think all purchases on credit cards will be charged interests, but this is also another misconception.
Most credit cards have a payment due date 21 days after issuing credit card statements—this is called the interest-free grace period.
As long as you are able to pay your credit card balances in full and on time, you will pay no interests.
Let’s extend the example above:
Richie purchased the $1,000 laptop on April 10th within his credit card statement period that runs from April 1st to April 30th. His credit card has an interest-free grace period of 21 days, and so his due date is set to be on May 21st.
If Richie pays back the $1,000 in full to the credit card company any time between April 10th and May 21st, then that is all he has to pay. He doesn't have to pay any interests because there is none! (And, considering the $20 in cashbacks he receives from the purchase, his laptop effectively ends up only costing $980).
However, let's say if he neglected to pay for the $1,000 purchase in full before May 21st and he only got around to it months later. It is under this case that interests would have been assessed on the $1,000 balance, and he will end up having to pay off $1,050, $1,200, or more the longer he takes to settle the bill. Had he paid in full and on time, $1,000 would be all he had to pay.
What if I only make the minimum payments required?
Upon receiving a credit card bill, you will notice that there is a minimum payment required by a certain date.
Making the minimum payment will only ensure you don’t get hit with late fees, but any unpaid balance after the due date will still accrue interests.
This is why if you are able to pay off your credit card balance in full and on time, do it.
Let’s revisit Richie and his laptop purchase:
Upon receiving his credit card statement, there is a minimum payment of $10 required by May 21st.
If Richie makes the full payment of $1,000 before May 21st, he will not be assessed any late fees nor interests on his $1,000 balance.
However, if he only made the minimum payment required before May 21st, he will end up with a $990 unpaid balance which will be assessed interests which will stack month after month until he clears it up.
Over and Out
The key about owning credit cards without going into burdensome debts is to pay your balance in full and on time. When these two conditions are met, you will rake in rewards instead of debts because you do not have to fork out a single cent more in paying any interests.
Credit cards are only an issue if you have uncontrolled spending habits, or if you do not have sufficient cash to cover an upcoming credit card bill. In this case, it is likely that you would end up accruing credit card interests month after month, and you have to pay more than what you actually spent. Even if there are credit card spending rewards, they are essentially meaningless when compared to the extra amount of money that you have to pay in interests. Under these circumstances, it would be advisable to not have, or not use a credit card at all. If going into debt is absolutely necessary, consider other options first such as a loan or a line of credit with a lower interest rate than that of a credit card.