Gregory Karp, NerdWallet
Conventional wisdom about credit cards is often black and white, from whether you should use cards at all to which types deserve a slot in your wallet.
But personal finance is just that — personal, experts say.
“Financial advice is best when it is not one-size-fits-all,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling . “Everybody is different in the way they set priorities and manage budget decisions, so it makes sense that some advice may not be a perfect fit for all people.”
Credit card tips might be easier to understand when they’re binary — do this, don’t do that — but that advice usually doesn’t apply to everybody. In fact, some advice could hurt more than help.
Here’s a sampling of conventional wisdom on credit cards and why it might not apply to you.
• “Never use credit cards.” Cardholders can get in trouble by charging too much, then paying finance charges. That downside is real and important, but this advice ignores the majority of cardholders, who pay off balances monthly. Credit cards have many benefits, including convenience, building credit, rewards and fraud protections.
“There is a stigma associated with credit cards, but they can be effective money-management tools as long as you use them correctly,” said Paul Golden, spokesman for the National Endowment for Financial Education . “Much of the bad reputation originates from irresponsible use, overspending and using a product that isn’t quite right for you.”
• “Always use credit cards.” For those who regularly incur credit card debt or know they can’t trust themselves not to overspend with plastic, credit cards can be a lousy idea. Instead, cash and debit cards can help to curb spending. Besides, not everyone can qualify for credit cards.
• “Never pay an annual fee.” Plenty of good credit cards charge nothing. But cards with annual fees typically offer rewards and benefits. They might include sign-up bonuses, airport lounge access and hundreds of dollars in travel credits. “Not paying an annual fee is good advice in general, but there are some circumstances when the value of earned rewards might outweigh the cost of using the card,” McClary said.
• “Don’t transfer balances from card to card.” The idea behind this is that moving debt to different cards doesn’t address the problem of paying it off. In fact, it could add to debt because balance-transfer cards often charge a fee of 3 to 5 percent of the amount transferred. But the upside is, balance-transfer cards can provide breathing room for carrying balances without finance charges — often more than a year. That’s useful when you can’t pay now but likely could pay later.
• “Always use a rewards card.” If you use a card as a payment tool and pay the balance in full every month, a rewards card is ideal. But for those who carry balances and pay finance charges, the interest would be more than the rewards. A low-interest card or one with an introductory zero percent offer is better for those cardholders.
• “Never close a credit card account.” Closing an account can hurt your credit rating, because scoring formulas like to see that you aren’t using more than 30 percent of your available credit (less is better) and a lengthy credit history, both of which suffer with a closure. Still, you might want to cancel an unwanted card to avoid paying an annual fee — if the issuer won’t let you downgrade to a no-fee card.
“If you’ve had an account for a few years and it has a decent limit and is in good standing, then keep it,” Golden said. “However, if you’re paying a hefty annual fee, you will have to decide if it’s worth the credit-score hit to close the account.”
• “Always pay your bill in full.” You should pay off your credit card bill monthly to avoid paying finance charges. An exception might be during times of hardship, when paying for a necessity, such as rent or food, trumps paying the credit card bill in full. Or you might be within a zero percent interest period on your card and decide to use cash to address a different financial priority.
“Carrying a balance can be a costly proposition, so if it becomes difficult to manage the debt you owe, it is best to have a conversation with your creditor and consider getting help from a nonprofit credit counseling agency before things get worse,” McClary said.
