Credit Card Misconceptions

Avoid Increasing Your Credit Card Limit

Many credit cardholders avoid increasing the limit of their credit cards. This is because they believe that an increase in the credit limit will lead to an increase in their spending habits. They fear that this will eventually lead them into a debt trap.

You need to understand that if used wisely, an enhanced credit limit can improve your financial health and also help you meet financial emergencies. An increased credit limit will reduce your credit utilization ratio (CUR) and this, in turn, will improve your credit score in the long run. CUR is the proportion of the total credit limit which you have used. Ideally, you should try and keep your CUR within 30%.

You Do Not Incur Any Finance Charge When You Pay the Minimum Amount Due

A few credit card users believe that when they pay the minimum amount due, they will not have to pay the finance charge. This is not true as the payment of the minimum amount due will only reduce your late payment charge. You will still incur a finance charge on the unpaid amount of your credit card bill. You should also note that credit card issuers can revoke your interest-free period or stop new credit card transactions until you pay the outstanding amount.

If you are not able to pay the credit card bill in full, you can always convert the outstanding amount into Equated Monthly Installments (EMIs). The interest you will have to pay on the EMI conversion will be lower than the finance charges which will be levied. Also, the EMI conversion comes with a tenure of up to 5 years.

Choose Credit Cards Which Have Zero Annual and Renewal Fees

Although many people prefer credit cards which have zero annual and renewal fees, you should choose a credit card not just based on the fees, but according to your spending pattern and requirements.

For example, a shopping credit card helps you earn cashbacks and reward points on lifestyle, retail and grocery expenses. A fuel credit card on the other hand offers discounts on your fuel spends. If a credit card with an annual fee meets your needs and offers a lot of benefits, then it is better to choose it over a card without any annual fee which offers lesser benefits.

You Should Close Unused Credit Cards for Improving Credit Score

  Yes, it is true that closing your existing credit cards can help you save on the annual fee and renewal fee. However, this can also reduce the average age of your credit account which will in turn reduce your credit score. You should note that when you close a credit card, it will lower your available credit limit. This will increase your CUR and once again impact your credit score. If you however want to close credit cards, you should close the newer ones.  

Now that you know the truth behind the myths about credit cards, you can break free of all restrictions and make the most of your card. Spend wisely!