TL;DR

A mother’s misguided advice to maintain a 30% credit card balance to avoid account closure highlights a common misunderstanding of how credit works. This false belief, echoing past financial myths, can lead to unnecessary interest payments and missed opportunities, emphasizing the importance of reliable financial education.

Story

Sarah, a college student, received her first credit card. Her mom, echoing a surprisingly common misconception, advised her to carry a 30% balance each month. This, her mother claimed, would keep her credit score high and prevent the credit card company from closing her account. It sounds insane, right? But this false belief, rooted in a misunderstanding of how credit works, is more widespread than you might think. It’s a modern-day variation of older financial myths that have cost many people dearly.

The mechanics are simple, but the implications are devastating. Sarah’s mom believes that credit card companies profit solely from interest payments. This is partially true—they do profit from interest—but this isn’t their only revenue stream. Credit card companies also receive transaction fees from merchants every time a purchase is made. Paying your balance in full each month means you avoid interest charges but doesn’t mean you’re somehow cheating the system. In reality, the credit card company still makes money from the transaction fees. In fact, if you pay your balance in full and in a timely manner, your credit score will improve, not get worse, as it signals responsible financial behavior.

The human impact? Millions have been duped into paying unnecessary interest, a silent tax on their hard-earned money. Some, like Sarah, are only beginning to navigate the complexities of personal finance; others have been caught in this web for years. It’s not dissimilar to some of the scams that fueled the 2008 financial crisis—misinformation leading to poor financial decisions with significant consequences. The interest paid isn’t just money lost; it represents opportunities missed—investments not made, dreams deferred.

The lesson? Be skeptical. Don’t blindly trust advice, even from loved ones. Question everything. Before making any financial decision, verify information from reputable sources, not from casual conversation or outdated ideas.

In short: Don’t let the myth of the ‘30% balance’ bankrupt your future. Pay your credit card balance in full every month, and don’t pay for lessons that cost far more than the interest you could be avoiding. ‣ Credit Score: A numerical representation of your creditworthiness, based on your history of borrowing and repaying debt. A higher score typically means better loan terms and lower interest rates. ‣ Interest: The cost of borrowing money. Credit cards charge interest on the unpaid balance.
‣ Transaction Fees: A percentage of each purchase that merchants pay to the credit card company.

Advice

Always verify financial advice from multiple reliable sources before making decisions. Don’t fall for common myths that could cost you dearly.

Source

https://www.reddit.com/r/personalfinance/comments/1mc08rb/student_w_their_first_credit_card_my_moms/