While some misconceptions restrict users from making the most of their credit cards, others may result in wrong usage. Let’s understand 5 widespread misconceptions about credit cards.
When properly used, credit cards can be a useful tool for strengthening your financial health. However, like any other financial product, credit cards too are surrounded by various misconceptions. While some misconceptions restrict users from making the most of their credit cards, others may result in wrong usage.
Let’s understand 5 widespread misconceptions about credit cards we shouldn’t fall for:
Misconception No. 1 – Credit cards can harm your financial health
Many of us avoid applying for a credit card owing to the fear of falling into a debt trap. While irresponsible usage can sweep you into a debt trap, a disciplined approach to credit cards can inculcate huge value to your overall financial health.
Those who are new to credit can build credit history by using credit cards, given that card issuers generally report account activities to the bureaus. As transactions via credit cards are the same as taking loans, repayment of outstanding credit card dues would have a similar impact on your credit score as any other loan type.
Besides providing instant credit access, credit cards also come with attractive discount and cashback offers, reward points, free lounge access etc, which if managed properly can help in saving a sizable amount.
Misconception No. 2 – Finance charges are not incurred on payment of minimum due amount
Credit card users generally assume that payment of minimum due amount can save them from incurring finance charges. However, paying the minimum due amount only cuts down on the late payment charge. One would still continue to accrue finance charges on unpaid credit card bill amount. Also, non-payment of credit card dues in full can lead to revocation of interest-free period or fresh credit card transactions until the outstanding dues are paid in full.
Consider paying your credit card dues in full by the due date or convert the outstanding amount into EMIs, in case you are unable to pay the full bill amount. As interest cost of EMI conversion is much lower than the finance charges and comes with a tenure of up to 5 years, converting credit card bill, either in full or part, would allow you to make repayment at much lower interest cost in smaller tranches in the form of EMIs.
Misconception No. 3 – Credit limit enhancement should be best avoided
Credit cardholders generally avoid enhancing their credit limit as they fear that it would lead to increased spending and subsequent debt. However, what they miss understanding is that if used judiciously, an enhanced limit can not only assist in improving their financial health but also help meet immediate financial emergencies.
Firstly, a higher limit would lower your CUR (Credit Utilization Ratio) i.e. the proportion of the total credit limit used by you. A reduced CUR would gradually increase your credit score, which would in turn enhance your credit card and loan eligibility. Secondly, an enhanced limit can also allow you to avail a higher loan amount in times of financial emergencies by opting for loan against credit cards.
Try and keep CUR within 30% as exceeding this limit would not only lower your credit score but also project you as a credit hungry individual. CUR can be brought down by either requesting for credit limit enhancement on your existing credit card or by applying for an additional credit card.
Misconception No. 4 – Unused or old credit card should be closed to improve credit score
While closing your existing credit cards may lead to savings as it would cut down on annual or renewal fee outgo, doing so can bring down the average age of your credit account, which would reduce your credit score by some points in the short term. Moreover, closing any of your credit cards also lowers your total available credit limit, which may further lead to a rise in your CUR that is again capable of lowering your credit score.
Thus, avoid closing older credit cards. Those with multiple credit cards wanting to close any of them, should try closing relatively newer ones. However, before doing so, try getting the credit limit of your existing card increased as closing any credit card can enhance your CUR.
Misconception No. 5 – Credit cards having zero annual/renewal fees are better
While zero fee credit cards are highly preferred by many, one should choose credit cards as per their spending pattern. Most of the credit cards are focused at meeting specific kinds of target audience and reward them with particular benefits or reward points according to their transactions. For example, shopping cards offer higher benefits on groceries, lifestyle and other retail spends while fuel credit cards offer higher discounts and cashbacks on fuel transactions. Likewise, travel credit cards attract frequent travellers by offering them higher reward points, cashback and discounts on travel, hotel stay and dining.
Thus, before opting for a credit card carefully analyse your spending pattern and transactions. If choosing an annual fee credit card renders you with higher benefits on particular transactions that you often conduct, then go for it. It would not only benefit you on your frequent transactions but may also come with added benefits like complimentary lounge access, dining privileges etc, which may be missing in zero fee credit cards. If you add up the benefits of such credit cards, you would find they more than make up for their annual/renewal fees. Note, card issuers may also waive off annual/renewal fee on spending beyond the threshold amount in the previous year.
(The author is Director, Paisabazaar.com)