8 Things My Friends and Family Get Totally Wrong About Credit Cards

Financial advice is everywhere these days, and financial opinions are even more prevalent. Unfortunately, some are more informed than others.

Since I first learned about the world of credit card points — which was a decade ago — I’ve heard all sorts of opinions about credit cards, airline miles, and travel rewards programs from friends and family. Unfortunately, many of these are based on mistruths and misconceptions.

Here are 8 misconceptions my friends and family have about credit cards and points, plus the truth of the matter to help you separate fact from fiction.

1. Opening Lots of Credit Cards for Points Is Illegal

Let’s start with the most interesting first: Opening lots of credit cards to earn extra points and miles is illegal.

It’s absolutely not. However, a friend was so convinced of this (and that I was going to run afoul of law enforcement), that she wouldn’t let me gift her a credit card perk.

Since she and her husband didn’t have Global Entry, I offered to pay for her application fee. I have multiple credit cards offering Global Entry statement credits, so I would have been reimbursed for it and paid nothing out of pocket.

However, she didn’t want to get “mixed up in” whatever I was doing by enjoying the perks of my credit cards. She was afraid she’d be guilty by association!

Luckily, there’s nothing illegal about applying for multiple credit cards for their perks and points.

Granted, each bank has its own credit card application rules to reduce the number of people opening credit cards merely for the points (and not to become engaged customers) and you should understand those rules to avoid losing your points. You also shouldn’t do anything fraudulent to try to get more points. However, these rules are very different from thinking that getting multiple credit cards is against the law.

2. Having a Credit Card Automatically Ruins Your Credit

A credit card is a tool that can be used well or poorly. Simply having one in your wallet is neither good nor bad.

That seems to surprise many people, as there’s a lot of “credit cards are bad” advice in the U.S. Using credit cards poorly is bad, but simply having them isn’t necessarily bad.

Having credit cards and not paying the bills on time is bad. It can lead to debt, damage your credit score, and create long-lasting harm.

However, using cards responsibly, including paying the bill on time (and in full), doesn’t harm your credit. In fact, based on what we know about credit scores, using a credit card responsibly can actually help your credit score.

3. Having More Than 1 Credit Card Means Bad Things

People really tend to freak out when they hear I have a lot of credit cards. Yes, staying on top of the multiple due dates requires diligence. It’s not for the unorganized person, that’s for sure!

So long as you stay organized and pay your credit card bills on time, having multiple credit cards may not look bad on your credit report. In fact, it may help.

That’s because a full 30% of your FICO credit score is based on the ratio of how much you owe to how much credit is available to you. Often known as your credit utilization ratio, this clarifies why having multiple credit cards can help you in this area.

Imagine you charge $5,000 on your credit card every month, and the card has a limit of $10,000. You pay the bill in full and on time, but your credit report says you’re using 50% of your available credit.

Now, imagine you open another credit card with a $10,000 limit, and you’re still only spending $5,000 monthly across your cards. Your utilization drops down to 25%. What if you open more credit cards and have an available spending limit of $50,000? You’re now using just 10% of your available credit.

4. Having Perfect Credit Requires You To Have No Credit Cards

I’ll never forget the shock a friend experienced when trying to buy a home.

She and her husband had no debt. They’d paid cash for a car and didn’t have any credit cards. They didn’t owe any money to anyone, and they were rather proud of that.

They assumed they had perfect credit because of this.

After saving for a down payment, they wanted to buy a home. When they went to the bank to negotiate a home loan, they were told that they had no credit history and were denied. Rather than perfect credit, they had no credit, as there was no history of them borrowing anything to show whether they would repay responsibly.

They were shocked when the banker suggested they each apply for a credit card, use it responsibly, and come back in a year. It contradicted their mindset that no credit and perfect credit were the same thing.

Using a credit card responsibly for a year allowed them to establish credit history — though short — and prove they paid their obligations on time. Finally, they were approved for a home loan.

5. There’s No Way To Avoid Paying Interest

If I had a penny for every time I’ve heard “I don’t use credit cards because I don’t want to pay interest,” I’d be rich. Many people assume they’ll pay interest on everything they charge to their credit card.

That’s not true. You only pay interest on your credit card if you don’t pay the entire bill by the due date. It’s entirely possible to never pay interest on a credit card, assuming you pay the entire balance from your last billing statement by the due date each and every month.

6. You’ll Get Denied for Loans

There’s a bit of a gray area here, but many people assume that having lots of credit cards will look bad when applying for a car loan, home loan, or other type of financing. That could lead to an application being denied or a higher interest rate on your approved loan.

Yes, the person reviewing your application may be surprised by how many cards you have, but that doesn’t necessarily mean you’ll be denied. Your credit report covers other factors, and how you use the cards matters significantly. You can also discuss your situation with the loan agent, including your current income as it relates to your existing debt (if any).

When my wife and I bought our car, the loan agent laughed at how many credit cards we had, but he was more focused on our payment history. Our income, credit scores, and reliability trumped his original surprise, and we got the best rate the dealership could provide for our loan.

7. You Have To Pay Taxes on Points and Miles

If your rewards were earned from spending, that’s considered a rebate and not subject to taxes. However, rewards that don’t require any spending — such as a referral bonus when a friend applies for a credit card or a bonus given simply for keeping the card in your wallet — may be subject to taxes.

Consult with your tax adviser to be sure, but you shouldn’t need to declare nontaxable rewards on your tax return.

8. Cash-Back Is Always Best

“Nothing beats cash!” Sure, it’s reliable. You can always spend it, unlike hunting for elusive award seats on a flight during spring break. Plus, you always know what it’s worth.

That said, “best” is subjective. If we’re talking about value, the value of cash is its ease of use — and the fact that you can pay your bills with it, unlike hotel points.

If you check out our points valuations, though, you’ll see that we value miles and points in multiple programs above 1 cent each — making them worth more than the face value of earning cash-back.

Would I pay $5,000 for a one-way flight over the Atlantic in business class? No. Would I gladly redeem 60,000 points plus $200 in fees for that ticket? You bet. That’s worth much more than $600 in cash-back in comparison.

Final Thoughts

Over the years, I’ve heard a lot of bad financial advice mixed with misconceptions about credit, credit cards, and earning rewards from them. These are the most common untruths I hear from friends and family, and I hope these can help you better understand the way you can use credit cards for handsome rewards.