Credit cards are about as American as apple pie. According to ValuePenguin, the average American has more than two (2.35 to be exact) carrying a total balance just north of $5,550. Obviously, this figure will vary depending on factors such as age, income, cost of living by location and more. But the point remains: It’s very common for Americans to have one or more accounts, along with cumulative outstanding balances in the thousands of dollars.
However, while credit may be very common among American borrowers, there are still plenty of misconceptions floating around. At best, learning you’ve been misinformed about some aspect of credit can be surprising. At worst, however, it can end up damaging your credit rating.
Let’s consider four common misconceptions Americans have about credit card debt.
Misconception #1: Debt Only Affects Low- to Middle-Income Earners
The reality is U.S. adults with a net worth of $100,000 or better are actually more likely to carry credit card debt. In fact, those who earn between $100,000 and $199,000 hold the most credit card debt of any income bracket.
One potential reason is the pressure high earners may feel to keep up with colleagues and neighbors in terms of consuming and traveling. But daily expenses topped the charts for this group, with 28 percent of respondents saying this is the biggest reason they’re carrying a balance.
Misconception #2: The Amount of Debt Matters More Than the Type
Another myth worth busting is that all debt is created equal — that looking at how much debt you hold is more important than breaking it down by type.
Say your friend holds $50,000 in debt. This information alone tells you little about their financial situation. There’s a big difference between having $50,000 left to go on a 15- or 30-year mortgage and having $50,000 in credit cards and medical bills — which typically carry much higher interest rates.
It’s important to understand why a credit card obligation is universally regarded as “bad debt,” the kind that will rarely bring you any return value the way mortgages and student loans will. It’s in your best interest (pun intended) to address credit card debt assertively due to its high interest rates and enticingly low minimum payments — both of which can keep you in debt for years by growing your balances over time.
Whether you come up with a budgeting/repayment plan on your own, enroll in a debt settlement program like the one offered by Freedom Debt Relief, work with a credit counseling agency or decide to consolidate your debts, it’s beneficial to get rid of credit card debt in a timely manner.
Misconception #3: Credit Cards Balances Are OK Up to the Max Limit
Credit card limits represent the top end of what you can and should spend on a credit card, right? Actually, getting anywhere near your maximum limit can negatively affect your credit utilization rate — otherwise known as the percentage of available credit you’re actually using at a given time. And your credit utilization rate is in turn heavily factored into your credit score.
So, if you’re using more than 30 percent of your available credit — on any single card as well as cumulatively across all of your cards — you’ll see your credit score drop. Avoid getting anywhere near a card’s limit unless it’s an emergency. Get into the habit of paying down as much of your balances as you can each month to keep your credit score in better standing.
Misconception #4: A Late Payment Is a Late Payment, So There’s No Rush
A late payment has the power to damage your credit score, but there’s still incentive to get that past-due payment in ASAP. The later the payment, the worse the damage — and eventually, a payment later than 180 days or so will result in a charge-off in which the original creditor sells your debt to a collections agency.
The more you know about what’s true and false regarding credit card debt, the better you can manage your accounts. Keep asking questions and avoiding common fallacies like these.