Financial products in India usually come with their own sets of myths and misconceptions. Credit cards are no exception. Some of these misconceptions stop people from applying for credit cards, others lead to wrong usage. Both can have adverse effects on your financial life. Here is a list of major credit card myths that need to be set straight.
Credit cards are not good for your financial health
Many refrain from applying for credit cards fearing increased spending and high interest rates on failing to repay credit card debt. While it might be true for those prone to impulsive spending or lacking financial discipline, credit cards can add great value to your financial health. As making payments through credit cards is equivalent to taking loans, they help build credit histories for those who have never availed loans. Secondly, they finance your regular expenses for free by offering interest free period on your credit card transactions for up to 50 days. Finally, they also save money for you by offering attractive discounts, cashback offers, reward points etc on your card transactions.
Paying minimum due amount does not attract interest
Many cardholders believe that just paying the minimum due amount will save them from paying interest or finance charges. However, paying minimum due amount would only save you from late payment penalties. You will still be charged finance charges on the rest of the outstanding amount. Moreover, the interest-free grace period on your fresh transactions will stand revoked till the repayment of the entire outstanding bill amount.
Signing on the back of the credit card is not necessary
Most credit card holders ignore the rule of signing on the back of their credit card simply because merchants do not care to tally the signature on the credit card slip with that on the card. Card issuers clearly state that a card without authorised signature is an invalid card. Thus, the merchant has the right to refuse an unsigned card. Similarly, signing your credit card reduces the probability of its misuse on its theft or loss as it allows the merchant to cross-check signatures.
Credit limit increases should be best avoided
Although a higher credit limit may tempt you to increase your spend, it would also allow access to higher credit in case of financial emergencies. Also, a higher credit limit is beneficial for your credit score. That is because your credit utilisation ratio, which is the proportion of the credit limit availed by you, is one of the key parameters while calculating your credit score. As lenders usually prefer applicants with credit utilisation ratio of less than 30%, credit bureaus too score such people higher.
Closing unused credit card will improve credit score
While closing your unused credit card is always advisable, especially, since it unnecessarily drains your finances in the form of annual or renewal fee, doing so might reduce your credit score in the short term. As closing your credit card would reduce your total available credit limit, it might increase your credit utilisation ratio. This in turn will reduce your credit score.
The writer is VP & Head of Payments Products, Paisabazaar.com