As per July 2017 RBI statistics, there are nearly 32 million active credit cards in India, but inner workings of credit cards is still a mystery for many. This is typically due to low financial literacy levels and a huge amount of misinformation circulating around credit cards. Many of us have a love-hate relationship with our credit cards. There’s no doubt about their convenience, the way they let you spread big purchases out over a longer period of time, or even the many perks you can get such as free movie tickets, or reward points… but despite this, many people remain wary of the plastic in their pocket.
In this article, we’ll bust three common myths related to credit cards
Myth #1: You should carry forward a balance on your credit card every month to build a high credit score.
Fact: You do not need to carry forward a balance on your credit card to have a great score. Rather, you would be charged interest 3%-5% per month in case the bill is not paid in full every month. It is the credit card utilisation rate which needs to be kept in check while using credit cards. Credit card utilisation refers to how much of your available credit card limit you use at any given time.
Dividing your total credit card balances by your total credit card limits gives you the credit card utilisation rate. The resulting percentage is one of the factors used by most of the credit bureaus because it’s often correlated with risk of making a default.
If you keep your credit card utilisation rate below 30 percent, you tend to have higher credit scores, but your credit report should show lenders you’re using credit responsibly by pay off your credit card bill in full each month. Carrying a balance forward could cause you to pay high interest and also lower your credit score.
Use these three tips to make you lower your credit utilisation:
Make credit card payments more than once a month
By doing so, your credit card balance never gets too high. Your credit card issuer will usually report your credit history to the credit bureaus once a month. So, if you’re able to pay off even a portion of your credit card bill before the due date, you can pull down your credit utilisation.
Spread your usage across multiple cards each month.
If your spending are made usually through credit card, it is good to keep a number of credit cards. When you use multiple cards to make your spends, it will result in multiple credit card accounts of low credit utilisation rate rather than one account with high utilisation rate.
Increase your available credit limit.
If your income has increased and you’ve maintained a good credit history, or if you have sampled amount of loans, it makes sense to ask for a credit limit increase. A higher credit limit would lower the credit utilisation rate.
Myth #2: You should close all unused credit cards as soon as they’re paid off.
Fact: If your credit card ‘s annual membership fee outweighs the benefits you typically derive from the rewards program, it’s better to close such credit cards. But if you’re not being charged annually for membership fees, it could be good for your score to keep those credit cards open. Having more open credit card accounts generally means a higher overall credit limit, which can help keep your credit card utilisation rate under the desired level. If you close credit a card with a high credit limit, your credit utilisation rate may go up and your score may fall.
Myth #3: It is safe to pay with a debit card than paying with a credit card.
Fact: As we get more exposed to world wide web, identity theft and data breaches are on the rise. Consumer protections against fraudulent charges on credit cards are typically stronger. Paying with a debit card can expose your bank account details to the possibility of fraud, and it can take months to get the fraudulent charges reversed. Further, if your bank account is under attack by a fraudster, the money you had in your bank account could be tied up while the bank investigates. You should opt for a zero-liability featured credit card.The advantage of this feature is that once you report a stolen or lost card to the bank, you’re not liable to pay for any spends made on the card.
Also Read: Know Your Credit Card
Myths like these could be a reason for you not getting a great score, or even putting your bank account at risk. Don’t let misinformation negatively impact your financial goals. By getting educated, you can use your credit cards to their full potential and better protect yourself from misinformed decisions.