What are 7 credit card debt myths that nobody should believe?

Ralph
00:00:00

Are you feeling trapped by credit card debt? Maybe you've heard that closing all your credit cards will instantly fix your credit score or that carrying a balance helps build credit. Well today, I'm going to be busting 7 dangerous credit card myths that could be costing you thousands of dollars. Stay tuned as I share a shocking story about how these myths nearly destroyed my small business but led to an incredible turnaround that changed everything. That's what I'm going to cover on today's show.

Narrator
00:00:29

Welcome to the Ask Ralph Podcast where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your host, Ralph Estep Jr.

Ralph
00:00:57

Well, thank you for joining me today on your quest to master your finances from a Christian perspective. I am so happy that you've given me some of your time.

And my goal today is to help you grow in your faith and also grow in your finances. Now, if you missed yesterday's show, we talked all about cash apps. How they work, how to protect yourself and listen, those are some essential tips in this digital age. So if you missed it, I'm going to encourage you to go back and check it out.

Now, let me share a message I received from Shane in Atlanta. Shane gave me a great question today. She says this. She says, "Dear Ralph, I'm drowning in credit card debt from my small business. I've heard so many conflicting things about credit cards. Some say to cut them up, others say I need them for my business credit. I don't know what to believe anymore. Can you help?"

Well Shane, as I said, that is a perfectly great question, and I've got some answers for you. Today I'm going to give you some clarity and I hope I give you some control. I want to remind you right now, you can send your questions at justaskralph.com. Just go right to that website, justaskralph.com and send me your question. And don't forget, every Tuesday night we go live.

That's right. The Ask Ralph show is live every Tuesday night at 7:00 PM Eastern time. You can go see that at askralphpodcast.com/live. We put it on YouTube. We put it on Rumble. We put it on LinkedIn. We put it on our Facebook Insiders group. And I'll talk about our insiders group a little bit later in the show.

You know, Shane, one of the things I try to do with every episode is find a Bible verse that really connects with the question. So I found this one and it's one I use quite frequently, but it really resonates with what you're talking about today. And it comes from Proverbs 22:7. And this is what it says. It says, "The rich rule over the poor, and the borrower is a slave to the lender." So on today's show, I'm going to show you how to avoid becoming a slave to the lender. Nobody wants that. And I'm going to show you a path to find that financial freedom that so many of us are seeking or eagerly seeking.

Well, let me start by saying this. This is a little bit dramatic, but not all debt is created equal. It just isn't. When it comes to credit cards, they can be both a blessing and a curse. I've done many shows on this. It all comes down to how you use them. So listen, I'm going to get real with you today. I mean really real. I'm going to personal story. Let me tell you about this. 10 years ago I believe the many of the myths we're going to talk about today. Sitting there, running my accounting business, thought carrying a balance on multiple credit cards would really help me with boost my credit score.

Well, the only thing it did was boost my money. It ended up costing me over $15,000 in unnecessary interest payments. See I'm an accountant and go back and figure those things out. I added it up and what a fool I was. So my goal today is to show you how these myths can really impact your finances. I'm going to share with you what I've learned through years of counseling others about their finances.

It's time to dispel some myths. So let's get it all started. And I'm going to share some links in the show notes. They have a few shows I've done on credit cards. They're really in-depth and I'm going to encourage you to go check those out. Well, let's get right to it. Myth number one. Carrying a balance builds credit.

Let me just start by saying that is a terribly harmful myth. And unfortunately, it's a very common thought. This is thought by so many people, but it costs countless people thousands of dollars in interest every single year. Here's the truth. Carrying a balance only does one thing. It makes you pay unnecessary interest. And guess who benefits from that?

The banks and the credit card companies. So you might be asking Ralph, but I got to carry a balance. It builds credit. What really matters? Well, let me tell you the truth. What really matters is your payment history. They want to see that you've been consistent, on time with your payments, but the bigger component to this with your credit score, specially is your credit utilization ratio.

You know I've talked about this on the show before. These are the two main components to your credit score. Are your payment history consistent and on time and have you kept your credit utilization ratio low? I'm going to give you an example. I had a client who carried a $5,000 balance for two years. I thought it was helping their credit score. But here's a little story.

It didn't impact their credit score at all, but did cost her a thousand dollars in interest. So myth number one. Debunk. Carrying a balance doesn't build your credit. Let's look at myth number two. Closing unused credit cards helps you build credit. Well, this is what I call a really shady tip, because what really happens when you close your credit card, your total available credit shrinks.

Think about it. If you've got three cards with $5,000 available on each, your total available credit is $15,000. Well, if you close one of those, it's going to reduce your available credit. So think about this. If you close that card, it's going to increase your credit utilization, especially if you've got balances on other cards.

Let me give you an example. Let's say you've got $10,000 in total credit limits. Okay. And then you've got $2,000 in balances. Well, if we do a quick ratio, 2,000 divided by 10,000 is a 20% ratio. That's very healthy. Very good for your credit score. Now let's say you decide, well, you know what, Ralph, I'm going to close one of those cards. I'm going to go down to a $5,000 credit limit. Well guess what happens now? All of a sudden, with that very move your credit ratio jumps to 40% because now you've got $2,000 of debt on a $5,000 total credit availability. You got to understand the mechanics of this. As I say on this show all the time, knowledge is power.

And the goal for your credit score is to keep that ratio at less than 30%. So here's Ralph's pro tip for today. Rather than closing accounts, you might actually want to open more accounts to get a better ratio. Now it's a whole lot of discussion we can have about opening them and opening them too quick.

You know, talk about that a little bit later in a show, but you also have to be regimented in that and be responsible in those things. So myth number two. Closing unused credit card helps your credit debunked. Not true. Let's look at number three. Myth number three is you must use your credit card frequently.

Now listen, this is another costly misconception. You don't have to swipe it all the time. It's just not true because when you do that, guess what's going to happen. It's going to lead to overspending. The key to the whole thing is to keep a great credit score. As we talked about, making those consistent payments, making those on time payments, have a net clean history.

And most of all, maintaining that low utilization. You really don't need to spend money to build credit. I've heard some people argue about that. And I'll say some good credit use is wise. Use your credit card responsibly, pay it off at the end of each month. I have no issue with that. If you want to use your credit card for every single transaction in your life, so long as you're paying it off at the end of the month and not getting over that 30% utilization ratio, go at it.

So number three, I think is really debunked. And that you must use your card frequently. Let's look at number four. Myth number four says more cards mean better credit. And this is a common misconception. One of the things that people think is I'm going to open up multiple cards quickly, but here's the problem. That can really harm you. That's what I call the credit card opening spree. And the problem is lenders might see blood in the water. They see this as risky behavior.

Let me tell you, when I was a credit union executive, one of the things I would have my loan officers look at and if they brought a loan for me to look at, I look at what is that proliferation of credit. That's a tough word to get out today, but proliferation. I mean, how many credit cards have they opened?

How much credit have they opened recently? Those things will affect your credit score. And if I'm the lender making a decision, I all of a sudden see all these credit cards being open, I'm starting to think is there something going on? Is there some problem that is ahead? And I've seen business owners get declined on what they needed money for because they were in this opening credit card spree. They open them too quickly, too fast.

And this proliferation of credit that can really get you in trouble. So number four, more cards mean better credit- debunked. Let's look at number five. Myth number five is credit card debt is good debt. Let me be blunt. It's just not so. Yes, it's tough to hear that. You've been trained or you've been taught that credit card debt is a fact of life, but it's not. It just doesn't have to be. Again, if you're using it responsibly, I give you a thumbs up, but here's the problem of credit cards.

They usually carry high interest. It's not like making an investment in education or not like making an investment in property where that value can appreciate. The fact is there is nothing good about paying 20% plus in interest. There just isn't. I challenge anybody to tell me where credit card debt is good debt. It just doesn't make any sense. Now using your credit cards, taking advantage of points, taking advantage of you know, benefits and all that kind of stuff as long as you're paying at the end of the month, great. So myth number five, credit card debt is good debt -debunked. Let's look at number six. Myth number six, you need a perfect payment history to have good credit. And listen.

This stresses a lot of people out. I talk to a lot of people both in my practice now and when I was doing lending, it stresses people out. They think they've got to have that perfect payment history. Now I'm not going to say that payment history isn't important. It absolutely is. But here's the thing.

We're all humans. We're going to make mistakes. You got to understand that a few mistakes will not doom your credit score forever. It just won't. The key is your recent history and your current habits. Here's a truth bomb. I've seen clients who went bankrupt. I mean, lost it all. Chapter seven, chapter 13, whatever that is. Lost it all, went through bankruptcy and in just a year or two, had a credit score of 700 plus points. Now look, I'm not promoting bankruptcy. Not by any stretch of the imagination, but all is not lost. You can start over and rebuild your credit. This is a time to learn from your past mistakes. I want to encourage you, it's all part of the journey. So all is not lost if you have a couple of bumps in the road.

In fact, when I worked as a credit union executive, I used to really embrace people who had bumps in the road. Some of the people I linked to were people who went through hell and back. They filed bankruptcy. They lost it all. It taught them lessons. It made them stronger. They say in the Bible, iron sharpens iron. To me, those are great people to lend to because they had learned their lessons.

So myth number six, you need a perfect payment history to have good credit - debunked. Let's move on to our last. Number seven. And that is myth minimum payments are enough. And listen, this is the most dangerous myth of them all because watch out. This is a huge trap. The goal of these credit card companies and these banks, and I have to say some credit unions is to keep you in debt for decades. Yes, you heard me right. Decades. Think about this for a second. I'll give you a simple example. Let's say you've got a $5,000 balance on a credit card with an 18% rate. Now 18% right now is pretty good because if you look around the market, plus 20, plus 25 are the norms. And let's talk about this.

We talked about minimum payments, right? A typical minimum payment is usually 2 to 3% of the balance. So I'm going to use 2% for my example. I'm running these numbers. If you do that, that's a $5,000 credit card and an 18% rate. If you just make the 2% minimum payments, it will take you 31 years to pay that off.

Listen, people have committed murder and serve less time. I know that sounds harsh, but it's the truth. If you pay the minimum payments at an 18% interest rate with a $5,000 balance, my tongue work in there today. You will take 31 years to pay it off. And guess what? If the interest retire, it's going to take you even longer. But here's the scary thing. That $5,000 credit card, you're going to end up paying $7,517 in interest.

That's right. The total amount to pay off on that $5,000 credit card at 18% is $12,517. That's that original 5,000 plus the interest. And this demonstrates clearly why making only a minimum payment is so very expensive. Listen, lenders love to keep you on debt. It's what makes the stockholders happy.

It's what grows their businesses. So this is a time to look at some debt pay off at the, maybe you're in that position. You're saying Ralph, I'm already in that place. Well I'm going to link to some prior shows about using the snowball method or the avalanche method. Choose the product that works best for your personality. But you got to get out of this credit card debt.

So myth number seven. That's what we said here. Minimum payments are enough- completely debunked. So I've debunked all 7. Here's the truth. You might be saying, Ralph, what are the keys to success, you're saying. And then I tell you, that's a great question. So I'm going to give you a few basic principles.

If you live by these basic principles, you will be far better off financially. The first one's this. Always, always, always pay your bills on time. You've got to be reliable. I've talked about this a few minutes ago. You've got to be consistent. You've got to maintain that financial responsibility. Second thing. Keep your credit utilization below 30%. Think of it like a gas tank.

A lot of people get really scared if that gas tank gets below a quarter of a tank. Now I'm not one of those people, like I've taken it to the extreme. For me, my car will pop up and say, you got 50 miles to go. And I'm like, cool. There's a challenge. Not a good thing to do with your credit card. Now let's talk about some business owner recommendations. I think it's fine to use credit cards strategically in your business. But the thing you got to do is number one, you've got to track expenses carefully.

You got to know where your money's going. It's very easy to just throw that plastic down and lose complete track of where your business money going. Second thing. Goes right along with that, you got to analyze spending patterns to identify areas for cost reductions. Listen. This is another truth bomb. Small changes make a big impact, but you've got to analyze those spending habits to see those things.

Number three, consider consolidating high interest debt into a lower rate loan. Listen. I've had business clients who have gotten themselves jammed up with credit cards. One of the things you can look at doing is doing some sort of consolidation loan, because it can truly save you thousands of dollars.

Do you really want to be paying 31, 30 to 40 years on those credit card balances? I know I don't. And the last one business recommendation, review your cashflow patterns to ensure you can pay your balances in full. I've said that a million times probably today. The goal is to pay in full each month to avoid those interest costs. It's fine to use credit cards so long as you are making that statement balance payment at the end of each month.

So you got to pay attention to that and make sure your cashflow is going to be available to do it because what you don't want to do and a lot of people do this is roll that balance over to the next month. It's going to cost you a ton of interest. And unfortunately what I've seen, it kind of becomes an avalanche and not a good one.

It just keeps rolling and rolling and then you open up another credit card and then, it just spirals out of control. Remember when we started with we said, Proverbs warned us that the borrower is slave to the lender. So we can use credit cards as a tool for convenience and protection, but it's not a way to finance a lifestyle we can't afford.

I don't know how many times I can say. Let me say that again. We can use credit cards as tools for convenience and protection. They're great for that. They're very convenient. You don't have to carry cash. It protects you. But listen, it can't be a way to finance a lifestyle that you can't afford. Now I'm going to share some action steps that you can take
if you find yourself dealing with credit card debt. But first, let me ask you a few questions. Do you feel overwhelmed with your finances? Do you feel like you're all alone? Do you want to escape the bondage of debt? Do you want to align your finances with your faith? Do you feel like you live in paycheck to paycheck? Do you feel frustrated, hopeless, and stuck? Well guess what? I got great news for you.

There is hope. I invite you to join the Ask Ralph Show Insiders group. We've got a community of people who feel the same as you. I felt the same as you. People who are facing these same challenges. The only difference is they're mastering their finances. They're living out their dreams. They're finding peace of mind and yes, they're feeling the same pain points as all of us. But they're seeking to balance their finances with their faith.

And best of all, the insiders group is sharing answers. We're sharing solutions, and big picture, we're sharing hope. Apply to join our community. Go to askralphpodcast.com/group and complete the questionnaire. And I'm going to encourage you to do it now and become a member of the insiders team. Now I promised I'd share some action steps with you, so here they are. These are my key action steps. Number one. Monitor your credit report regularly. It's essential for understanding. You got to do that financial checkup, whether it's twice a year or maybe every quarter, you want to do it at least once a year. Go to annualcreditreport.com. Get all three credit bureaus.

Take a look at them. Study them, use them as a guide book and learn from it. Number two, key takeaway. You've got to keep that utilization below 30%. If you want to have a good credit score or a great credit score, that is the key. Consistent history, on time payments and ratio below 30%, which leads me to number three. I encourage everybody to do this. Set up automatic payments to avoid late fees. It's a simple thing, but it can have a huge impact.

Now, one of the things I'm going to mention here is you might set those automatic payments up for the minimum payment. Be cautious of that. You don't want to get into that debt spiral. So you might set it up just to make the payment. But then pay attention and go and make the rest of that payment so you don't get yourself in trouble. And last but not least. If you're struggling with multiple high interest credit cards, and I did a show on this, consider debt consolidation to pay down some of that credit because it's just going to spiral out of control and don't forget to tune in tomorrow's show. I'm going to be breaking down the differences between the two types of 529 plan. And let me tell you, these can be good for parents or grandparents or anybody that's looking for ways to creatively fund college. It's sure you don't want to miss. And I'm going to ask you a question. After listening today, what small step will you take today to improve your credit use?

And I'm going to encourage you, share that in the insiders group. So you've got to go and join the first member. askralphpodcast.com/group. Or if you'd like to share your answer on justaskralph.com. Remember, my passion is to help you achieve financial success. I want to see you live out your dreams. I want to see you grow in your faith. And I know together, if we work together, we can master your finances from that Christian perspective. So as I always say, stay financially savvy out there and may God bless you.

Narrator
00:20:23

Thank you for joining us on the Ask Ralph podcast, and with a simple click to subscribe, we'll invite you back to our next episode. And remember, financial issues don't have to be complicated.

Just Ask Ralph the information contained in this episode of Ask Ralph is based on data available as of the date of its release.

Saggio Accounting plus and Ask Ralph Media, Inc. Is under no obligation to update this content if changes occur.

Applying this information to your specific situation requires careful consideration of all facts and circumstances, and any information provided is not to be considered as financial, tax or legal advice. Please consult your tax advisor or attorney before acting on any material covered.