7 irrational credit card fears (and 7 REAL worries)
Are you or someone you know afraid to use -- or even obtain -- plastic? Sure, credit cards come with a series of essential cautions, but overall they are safe and useful financial management tools. Here are the top seven most exaggerated credit fears, along with the real concerns that come with the responsibility of carrying credit:
|7 CREDIT CARD FEARS VERSUS REAL CONCERNS|
|Fear No. 1: Dinging credit score by applying for credit||Real concern: No credit history|
|Fear No. 2: Online shopping||Real concern: Fraudulent websites|
|Fear No. 3: Going credit crazy||Real concern: High debt and late payments|
|Fear No. 4: Asking creditors for help||Real concern: Running from credit troubles|
|Fear No. 5: Insufficient borrowing power||Real concern: No savings or insurance|
|Fear No. 6: Credit counseling||Real concern: Credit repair doctors|
|Fear No. 7: Going to jail||Real concern: Wage garnishment|
Fear No. 1: Severely damaging your credit score by applying for credit. Many fear that a single credit application will cause their scores to plummet. That's too strong, says Lucy Duni, vice president of consumer education for TrueCredit.com by TransUnion. The imact exists, but it's minimal. With each application, a hard inquiry is added to the report, causing a slight decrease. How much? "About five points is a good rule of thumb," says Duni. Multiple inquiries in a short period do add up, so apply prudently.
Real concern: No credit history. Someday you may want to finance a home or car, apply for a business loan, or get a credit or charge card. Lenders can assess your creditworthiness only by the way you've borrowed and repaid money in the past. Without a history to evaluate, you're automatically ineligible for the best terms. Lisa Westermann, assistant vice president for Wells Fargo agrees, "By using credit responsibly, consumers can go a long way in building strong and healthy credit that generally results in better interest rates."Fear No. 2: Online shopping. Anxious about the privacy of your personal information when purchasing from your favorite online stores? Sixty-one percent of adult Americans share your worry, says a 2008 survey by University of Southern California's Center for the Digital Future. However, reputable websites that employ up-to-date security and payment systems are at least as safe as traditional retailers, reports Linda Foley founder of the Identity Theft Resource Center, a nonprofit consumer education organization.
Real concern: Fraudulent websites. Virtual shopping is only as secure as the sites you visit. To protect your personal and financial information from "phishers" (thieves who build fake websites that mimic legitimate sites), type the business's name into your browser rather than responding to e-mail advertisements. "When in doubt, find out who owns the domain name by checking them out on online," recommends Foley. "If it's registered in some other country like Nigeria, log off."
Fear No. 3: Going credit crazy. If you overcharged in the past or know how easily you get in over your head, you may be skittish of the credit world. Maintain perspective. While it's important to respect your personal parameters, using plastic wisely is simple: Just charge the amount you can cover in full when the bill arrives, and pay before the due date. You can even profit a little by using cards that allow you to earn points for cash, goods and services and airline miles.
Real concern: High debt and inconsistent payments. The true credit score killers are late payments and balances that exceed half of your credit limit. When combined, they total 65 percent of a credit score. Inquiries comprise just 10 percent of the score (the other two categories are length of credit history at 15 percent; and types of credit in use at 10 percent). So while limiting credit applications is wise, concentrating on debt management is crucial.
Fear No. 4: Asking creditors for help. Another widespread yet groundless fear is that asking a creditor for assistance in times of trouble will prompt immediate suspension of charging privileges, a huge interest rate increase or even a lawsuit. Put that anxiety behind you, says Westermann, who urges cardholders to call their creditors as soon as they think they might have problems paying their bills. Most creditors will do their best to work with you to find a reasonable solution, but you've got to make early contact.
Real concern: Running away from credit troubles. While avoiding problems may be human nature, it only magnifies damage. Todd Huettner, a Denver-based mortgage broker, recalls how he tried to help a cash-strapped client deal with his creditors. "I explained that his lender had to be involved," says Huettner, who said the man chose avoidance instead. "He could have worked with all of them on a solution, but by doing nothing, the debt spiral accelerated and he has few options at this point."
Fear No. 5: Insufficient borrowing power. Afraid that without a large credit line you aren't protected against emergencies? Reject those feelings. Kristin Harad, president of VitaVie Financial Planning, contends that charging your way out of a disaster, even when the interest rate is relatively low, usually brings greater headaches down the line. "If you borrow $10,000 to get through a crisis on a 10 percent to 15 percent APR credit card, you could owe an extra $1,000 to $1,600 by the end of the year if you can't pay it back within a few months."
Real concern: Inadequate savings, insurance coverage or both. True financial security means having enough cash and insurance coverage to take care of unexpected setbacks. If you don't have at least three months' worth of essential expenses set aside, start saving now and make sure you are properly insured. "A bad car accident or a neighbor's child falling down your stairs could wipe you out. For a small premium you can mitigate these risks," says Harad.
Fear No. 6: Credit counseling. Contrary to popular suspicions, visiting a reputable accredited credit counseling agency has no effect on a credit report or score. After all, it's just a meeting with a financial professional who will review your needs and circumstances, then develop a budget and action plan. These sessions are usually free, too, and according to Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, often reveal options you may never have considered. However, if the credit counselor negotiates with your creditors on your behalf and works out a debt repayment plan, under which you end up paying less than you originally agreed, your credit report will be negatively affected.
Real concern: Credit repair clinics. Less-than-stellar organizations exist, so always check their credentials before working with anyone. Carefully examine fee-based companies that promise to mend damaged credit. "Be wary of anyone wanting payment to repair your credit," warns Cunningham. "No one can do anything to improve your credit report that you can't do for yourself for free."
Fear No. 7: Going to jail. One of the most disturbing and unfounded worries some borrowers have is that if they are unable to pay, they could wind up behind bars. Unless you willingly committed fraud, you cannot go to jail for nonpayment of unsecured debts, such as those incurred on your credit card. "There is no debtor prison in the United States," sooths San Francisco bankruptcy lawyer Patrick McMahon. If a creditor says you face jail? Nonsense. "Sometimes collectors will make statements that are not correct. Read up on the matter, get credit counseling, see a bankruptcy lawyer," McMahon advises.
Real concern: Wage garnishment and other judicial action. While you won't be imprisoned because of unsatisfied credit card bills, you certainly could experience other highly unpleasant legal repercussions. "A creditor may seek judicial relief by gaining a judgment against the debtor and then enforcing the judgment by a wage garnishment or taking bank accounts," says McMahon.
As a cardholder, you've got to identify which concerns are valid -- then take action so they are not a worry -- and put to rest those based on myths and fears. Do so and you'll gain the confidence necessary to use credit to your advantage.
Updated: October 14, 2009
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