Common Credit Card Myths: Facts for Better Financial Decisions

Common Credit Card Myths: Facts for Better Financial Decisions

Credit cards are among the most misunderstood financial tools in modern society. While they offer incredible convenience and numerous benefits, they are often associated with several misconceptions. Many individuals avoid using credit cards altogether, fearing the supposed pitfalls that come with them. These typical credit card myths, often perpetuated by word of mouth or misinformation, can hinder one's ability to take full advantage of the financial opportunities that credit cards offer. However, understanding the truth behind these myths is essential for anyone who wishes to use credit cards effectively and responsibly. This blog will explore some of the most common myths surrounding credit cards. Whether you are a seasoned cardholder or considering your first credit card, these insights will empower you to use your credit card as a financial tool, not a burden. So, let’s get started!

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Written By
Hepson Franklin
Hepson Franklin
Hepson Franklin is a seasoned financial expert and accomplished writer specialising in Financial Services, Investments, Loan Assessments, Mutual Funds, Banking & loan products. With a wealth of experience in the financial industry, he has established himself as a trusted voice, providing invaluable insights and guidance to both seasoned investors and those new to the world of finance. With a comprehensive understanding of the intricate facets of the financial landscape, he is dedicated to demystifying complex financial concepts for readers of all backgrounds.
Reviewed By
Amit Prakash Singh
Amit Prakash Singh
Co-Founder, Square Yards & Chief Business Officer, Urban Money
Amit Prakash Singh is the Chief Business Officer at Urban Money. With over nine years of experience at Square Capital, he has played a crucial role in establishing it as one of India's premier loan advisory services. Amit's deep financial insights and extensive knowledge have driven significant business growth and strategic advancements. He has successfully built and managed large sales teams, optimised costs, and created leaders within the industry. Amit's financial expertise and strategic vision are key to the ongoing success and expansion of Square Yards and Urban Money.

Carrying a Balance Boosts Your Credit Score

One of the most common credit card myths is that carrying a balance on your credit card helps to improve your credit score. Many people think that if they don’t pay off their full balance, the credit bureaus will view them as responsible borrowers who know how to manage debt. However, this is far from the truth. In reality, carrying a balance does not benefit your credit score at all. Instead, it increases the interest you pay each month, which can quickly add up and lead to financial strain.

Credit scoring models primarily focus on your payment history and the amount of credit you use compared to your credit limit. Keeping your balance low or paying it off in full each month shows responsible credit use and can positively impact your credit score. So, instead of carrying a balance, it’s better to pay off your credit card in full every month. This will help avoid interest charges and maintain a healthy credit score.

Closing a Credit Card Improves Your Credit Score

Some people believe that closing a credit card will improve their credit score. They think reducing the number of open accounts will make them more responsible to credit bureaus. However, this is one of the myths among many other credit card myths. When you close a card, your total available credit decreases. This can raise your credit utilisation ratio if you have balances on other cards. For example, if you have ₹10,000 in available credit across two cards and close one with a ₹5,000 limit, your available credit drops to ₹5,000. If you owe ₹2,000 on the remaining card, your utilisation ratio jumps from 20% to 40%. This can ultimately lower your score.

Additionally, closing a card can affect the length of your credit history, another pivotal factor in your credit score. If the card you close is one of your oldest accounts, you could lose some of the benefits of having a long credit history. Credit bureaus favour longer credit histories because they demonstrate stability and responsible credit use over time. Hence, it is advisable to keep your credit card open. This ultimately helps maintain your credit utilisation ratio and the length of your credit history, which are important for a strong credit score.

Having Too Many Credit Cards Hurts Your Credit Score

It is a common belief that you only need one credit card. While it’s true that having one credit card is better than having none, relying solely on one card can limit your financial flexibility and the benefits you could be receiving. Different credit cards offer various rewards, benefits, and interest rates. Some cards are excellent for earning cash back on groceries, while others might offer travel rewards or lower interest rates on balance transfers. You may miss out on opportunities to maximise these rewards and benefits based on your spending habits as you use only one credit card.

Moreover, having multiple credit cards can also improve your credit score by increasing your total available credit, which in turn lowers your credit utilisation ratio. The key is to find a balance that works for you. Multiple cards can be beneficial if you choose them based on your financial needs and manage them responsibly. Remember to always pay your bills on time, avoid carrying balances, and keep track of your spending to ensure that multiple credit cards enhance your financial well-being rather than complicate it.

Applying for New Credit Cards Will Hurt Your Credit Score

Many people hesitate to apply for new credit cards because they fear it will hurt their credit score. While it’s true that applying for new credit can have a temporary impact, the long-term effects are often misunderstood. When you apply for a new credit card, the issuer will conduct a hard inquiry into your credit report. This inquiry can cause a small, temporary drop in your credit score, usually by a few points.

However, the impact is only short-lived, and your score recovers quickly, especially if you manage your new card responsibly. It’s also worth noting that multiple hard inquiries within a short period can have a more significant impact. This is why it’s important to space out your credit card applications and only apply for one card at a time.

You Should Avoid Credit Cards to Stay Debt-Free

This is one of the most common credit card myths. People think they won’t risk falling into debt if they don’t use credit cards. While avoiding credit cards can prevent them from owing money on them, it also means missing out on some important benefits. The key is to use credit cards as a tool for managing expenses rather than as a means to finance a lifestyle beyond one’s means. Furthermore, not using credit cards can make it harder for you to establish or improve your credit score.

Getting approved for bigger financial needs like buying a house or a car might be difficult without a good credit history. Credit cards also offer rewards like cash back, travel points, and protections for your purchases, which can save you money. Hence, staying debt-free doesn’t require avoiding credit cards; it requires discipline and smart financial management.

Credit Card Rewards Are Not Worth It

Some people believe that credit card rewards are not worth the effort and might even be a trap to make you spend more. These kinds of credit card myths often stem from the idea that rewards programs are too complicated or have minimal benefits. However, credit card rewards come in various forms, such as cashback, travel points, and discounts on purchases. These rewards can add up quickly, especially if you use your credit card for everyday expenses like groceries, gas, and dining out.

The key to maximising rewards is to choose a card that aligns with your spending habits. For example, if you travel frequently, a card that offers travel points or airline miles can save you a significant amount on flights and hotels. Hence, if you pick the right card and use it wisely, credit card rewards can be a great way to save money and enjoy extra benefits without the risk of overspending.

Conclusion

Credit cards are powerful financial tools. Yet, the abovementioned credit card myths can lead many people to poor financial decisions. Understanding the truth about credit cards can help you use them effectively. Whether managing your credit score, taking advantage of rewards, or making everyday purchases, credit cards offer many benefits when used responsibly. Don’t let these myths guide your financial decisions. Instead, equip yourself with the facts. Thus, you’ll be better prepared to manage your finances and maximize what credit cards offer.

Urban Money