Friday, June 2, 2023

Myths About Credit Cards and Debt

Like anything else, credit cards can have a bad reputation.

Everyone is an expert in something, and what comes up in my research on this topic is that most credit card experts have never worked for a credit card company. Even the ones that seem sketchy. As for me, I make no claim to be an expert on the subject. What you will read here is a summary of the information I have gathered. I’ll try to make it completely clear and subjective. Also, I should point out that there is little objective evidence to support most of the myths circulating on the internet.

First, let’s address a question about loans and credit cards. In my research, the prevailing inquiries veer away from credit cards that reward debt. The definitive answer is an emphatic “kind of”. It is actually quite the opposite and the reasons seem logical. The rewards of getting little or no debt are widespread acceptance of more credit, which means it’s easier to get a personal loan from their local bank. Interest rates are also reduced due to the fact or perception that they pay their bills on time, keeping any credit card with a zero balance avoids building up bad debt.

On the other hand, a person with a relatively large loan amount is punished with higher interest rates and limited choice of resources for personal loans. The definition of what is bad debt is an arbitrary conclusion that is really determined by circumstance. Bad debt can be viewed as outstanding money with a higher interest rate attached to the initial loan. For example, getting a home loan at 4.5% is not a bad loan, nor is buying a car or a motorcycle with an interest rate of 7%. What would be the reason for bad debt in this scenario if the car or motorcycle loan is defaulted due to any reason. At the same time, multiple credit accounts open at the same time carry unpaid balances, some of which are near the limit, another example of bad debt.

some date is good

Sometimes taking on a certain level of debt is unavoidable. However, credit card companies reward individuals who have credit scores closer to the high end of the spectrum, anywhere from 650 to 850, with lower rates and higher limits for their accounts. Typical credit scores have a full range from 300 to 850 points, where up to 31% of this number comes from the amount of a person’s debt. The more debt a person has, the lower their score.

In the vast majority of cases, a person’s debt originates from a credit card that is brought in through voluntary means, pointing to the fact that the person applied and is considered a tangible credit risk because of their current score. I was accepted. Notice I said score, not rating. The ratings are not for “Joe Consumer” but for things like mortgage back securities or corporate bonds. A credit score is what a consumer receives through a credit report, which lists creditors, personal information, inquiries and collection items, all related to debts and dues.

loan maintenance

The best way to avoid debt is obviously to pay for anything and everything directly and in cash. Unfortunately very few of us have this ability. With this in mind, when dealing with a credit card we must consider whether it makes sense to pay it off in full on every occasion. This helps in avoiding unnecessary interest charges, which are due to minimum or missed payments. Again, this is an example of bad debt where there are missed payments and only minimum payments. Doing so will only harm a person’s reputation in the long run.

In the case of dealing with home loans and vehicle loans, paying a few dollars more each month can reduce the amount of interest on those loans. Face it, a good portion of mortgage payments are interest based. The same thing is with automobile loans. Naturally, at this point the controversy surrounding credit cards rewarding debt has cleared up. Credit card companies reward relatively low levels of debt and penalize relatively high levels of debt. As said, having almost no debt means better/lower interest rates with higher chances of approval on personal loans. Where it is completely opposite in cases where there is a high level of debt.

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