A lot of people who use credit cards do not actually know how they work. And there’s a lot of misinformation about credit cards doing the rounds. So, it’s easy for them to get caught up in the dos and don’ts of credit cards that may eventually harm their credit score.
Here’s a list of common credit card myths that get thrown around far too often and the real truth about them.
1- Avoid getting a credit card:
A common misconception is that carrying a credit card is a sure way of getting into debt. Yes, you are going to get into deep, unmanageable debt if you misuse your credit card. If you are a responsible credit card user, who knows how to budget and manage finances, a credit card is one of the best financial tools to establish and build your credit history.
There are various types of credit cards available that are designed to meet your unique needs. Whether it is the convenience or the rewards you are seeking, there is a credit card made to meet those needs.
2- Credit card charges an annual fee:
This myth has been successful in keeping people away from credit cards. However, this is not always true. There are some types of credit cards which have zero annual fees. If you want to get a credit card with zero annual fees, you need to research well in the market. However, it’s worth noting that a credit card with no annual fees may have limited rewards and benefits.
3- Keep the balance on your credit cards to build great credit scores:
That’s so untrue. Carrying a balance on your credit card doesn’t build your credit score, it only increases your total outstanding as interest gets added to the balance.
If you use your credit card wisely and keep the credit utilization ratio to less than 30%, you can improve your credit score. In fact, experts recommend paying off your balance in full to manage your credit card better.
4- Opening a credit card lowers your credit score drastically:
Opening a new credit card can drop your credit score by only a few points. If you have a credit score of over 700 points, a little drop will not affect you. But if you have a low credit score, then instead of getting a new credit card, you should work towards improving your credit score until you are eligible for better credit cards.
5- Credit card is free money:
Unfortunately, credit cards are not free money. So, don’t treat them like they are. Use your credit card only when you know you can afford to pay it in full. Whatever you plan to buy with your credit card, if you cannot afford it, then it’s not worth the debt, you may be accruing after buying it.
6- If you use a credit card, you’ll always pay interest:
Most people don’t know how a credit card actually works. It’s a misconception that you’ll always pay interest when using a credit card. If you pay off your entire outstanding balance in full every month, you need not worry about the interest at all.
7. Avoid a credit card with a high credit limit:
For a responsible credit card user, a high credit limit can be an advantage. When you have a high credit limit and low balance, your debt-to-income ratio is low, and that helps in building your credit score.
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at firstname.lastname@example.org.