Credit Card Insights: Debunking 8 Myths to Set the Record Straight

A credit card is a widely used and highly beneficial financial instrument that offers users a temporary credit line and enhances their ability to make purchases. It has significantly improved convenience in the daily life of individuals across various demographics, including students, salaried persons, homemakers, businesspersons, professionals, and retirees. Not only do credit cards offer various rewards and exclusive opportunities, but they also contribute to the development of one's creditworthiness. When faced with unexpected expenses, a credit card is often the most suitable choice. Nevertheless, many credit card users do not fully leverage the advantages of their cards due to prevailing myths and misconceptions. This article debunks some of these myths and provides a clearer understanding.

Myth 1: Using a credit card can harm your credit score.

Fact: This is a prevalent misconception among the general population regarding credit card usage. Many individuals refrain from using credit cards, fearing that it will adversely affect their credit scores. In fact, getting a credit card is an initial step towards building a strong credit score. When used responsibly and managed effectively, your credit score can significantly improve, making it easier for you to avail of loans in the future. While credit cards can indeed enhance your credit score, if not used wisely, your credit score will inevitably suffer. Hence, instead of succumbing to such scare tactics or flawed information, it is advisable to conduct thorough research and use your credit card responsibly. Having a credit card does not automatically lead to debt; in fact, it can undeniably boost your credit score.

Myth 2: Owning multiple credit cards negatively impacts the credit score.

Fact: Banks assess the credit utilisation ratio, which measures the percentage of credit you use compared to your approved limit. Remember that a credit card represents an unsecured loan provided by the bank. If you consistently utilise a large portion of your credit limit (resulting in high credit utilisation), it can indicate a negative signal regarding your creditworthiness. This holds true even if you pay your entire bill in full each month. By having multiple credit cards, you can ensure that the credit utilisation ratio remains within a healthy range on each card by spreading your expenses across them. However, it is crucial not to have too many cards as it can become cumbersome to manage repayments. Ideally, you should have one card for regular expenses and another for emergencies or significant purchases that arise occasionally. If you are concerned about utilising the available credit on your card, it is advisable to maintain a credit utilisation ratio between 20% and 30%.

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Myth 3: Paying the minimum balance is sufficient.

Fact: The minimum balance is the minimum amount required to avoid late payment charges, and it is only a fraction of the total amount due, which varies from bank to bank. However, relying solely on paying the minimum due is another financial mistake you can make.

In the short term, it may seem like a temporary relief, but trouble arises when the remaining unpaid balance accumulates and demands repayment. Continuously paying only the minimum due will lead to a significant pile of debt due to its high interest rate, leaving you with no viable solution. Moreover, your credit score will suffer as a result. It is essential to disregard advice suggesting that paying the minimum amount is sufficient. Instead, always strive to pay your dues in full. Avoid carrying balances forward to address them later, as this can negatively impact your credit score and hinder your ability to secure funds in the future.

Myth 4: It is acceptable to pay the credit card dues late as long as the full amount is repaid.

Fact: Making late credit card payments, even if you eventually pay the full amount, has a negative impact on your credit score. Consistently being late in bill payments is not considered good credit behaviour. Furthermore, you will be charged late payment fees and interest charges.

In today's digital age, banks provide various convenient options, such as online payment and UPI transfers, in addition to traditional methods like cheque payments. With these multiple convenient options available, there is no valid reason to miss credit card payments.

Myth 5: It is better to avoid credit cards with high annual fees and opt for free options.

Fact: Why would anyone choose to pay an annual fee when free credit card options are available? The answer lies in the benefits provided by fee-based cards. Free cards may not grant access to airport lounges or offer airline mileage rewards. They may also lack discounts at restaurants and other merchant outlets. The benefits derived from these cards often outweigh the annual fee. Moreover, many cards waive the fee if a certain usage threshold is met. Therefore, it is advisable to choose credit cards that offer discounts and benefits on the products and services you typically use.

Myth 6: Cancelling a credit card will boost my credit score.

Fact: This is a peculiar credit card myth. Simply cancelling a credit card does not lead to an improvement in your credit score. In fact, without a credit assessment tool (such as a credit card), lenders may find it challenging to evaluate your creditworthiness. Cancelling a credit card should only be considered if you possess excessive cards and wish to consolidate your outstanding balances into one card. Otherwise, a credit card serves as a convenient tool for lenders to monitor and assess your credit behaviour. Remember, when used responsibly, a credit card can simplify your life. It is all about exercising discipline while using it and ensuring timely bill payments.

Myth 7: Applying for a new credit card will negatively impact the credit score.

Fact: Applying for new credit, whether it is a credit card or loan, does have a minor effect on your credit score. However, if you manage this debt responsibly, it can actually improve your score. The key is to avoid excessive applications for new cards, but adding one or two additional cards will not harm your credit score as long as you make timely repayments.

Myth 8: You must maintain a credit card balance to establish credit.

Fact: While it is important to actively use your credit cards to showcase responsible credit utilisation, carrying a balance is not necessary. If you regularly use your card, it is advisable to avoid accumulating a high balance to avoid paying interest if you are unable to pay it off completely by the due date. While consistently making payments and practising sound financial habits can enhance your credit score, carrying an outstanding balance on your credit card has the opposite effect. Keeping unpaid balances on your credit card can create a negative perception for financial institutions and ultimately impact your credit score.

To conclude:

If any of these myths has misled you, it is an opportunity to learn from your mistakes and correct any misconceptions with these factual insights. Building a solid foundation requires understanding the fundamentals. By familiarising yourself with the functionality of credit cards, you can make more informed decisions. Hopefully, these credit card myths and facts will assist you in avoiding future financial mistakes and making wiser choices.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.