A credit card can be a good way to establish your credit history if used judiciously, especially for someone who is a first-time user.
Conversely however, the same card can destroy your credit history owing to the amount of incorrect information that abounds. Let us take a look at some of the most prominent myths surrounding credit card usage and how you can use cards to optimal advantage.
Minimum payment is sufficient – Most people believe that making only the minimum payment due on a card outstanding each month is enough. On the contrary, remember that while this may not impact your credit score as such, it has a bigger financial impact.
If you read the fine print, every time that you carry forward the amount outstanding, you pay heavily by way of interest rates and financial charges. Hence, it is best to pay off the entire each month as the bill comes in.
Let us assume you roll over payment to the next month. In that case, not only will you wind up paying hefty interest charges on that amount, but also for the new charges that you will incur on your card. This will consequently only make your repayment tenure longer, and the interest you would have paid would be much higher.
Cancelling a credit card increases your credit score – While this sounds plausible, it is not so in actual fact! It may in fact reduce your score, as when you close a card, you are reducing the amount of credit extended to you.
This can impact your credit utilisation ratio (which is the amount of debt you have in comparison to the credit limit extended to you). An ideal ratio to maintain is 30 percent of your assigned limit.
Hence, even if you believe that having the card in your wallet is a temptation and makes you spend more than you want to; consider keeping the card at home for a few days, instead of cutting it up and closing your card account.
Applying for a card reduces your score – Again, this is a popular myth that people believe impacts your credit score negatively. Each time you apply for a card, a ‘hard enquiry’ is made with a credit bureau. This does make your score dip, albeit for a temporary period.
In fact, opening a new card account can be beneficial over a long period of time, as a credit history is created. If you make timely payments, having a credit card that is long outstanding against your name can prove beneficial for your credit score – any good ‘old’ debt proves to a lender that you are in fact able to use credit judiciously.
Hence, do apply for a card when you need one – unnecessary multiple enquiries do not help an individual. When you do avail of a card ensure that you stay within the credit limit assigned to you and make payments on time.
It is good to have a low credit limit – Often; card issuers assign a significantly high credit limit to card users. Remember, this may not be a bad thing if you use this facility judiciously.
Ideally, not crossing more than 30 percent of the assigned limit is prudent, and a having a high limit will mean that you do not dent your credit utilisation ratio. Of course, this is possible only if you consciously stay within the limit and do not maximise card usage each month.
Hence, using your card wisely will mean a better credit utilization ratio, which in turn can have a positive impact on your score. This means you are in a way you are heading to increase the credit score.
It is better to have more credit cards – Not necessarily! In actual fact, the more number of cards a person holds, chances are that they will utilize all of them, and possibly spiral downwards into a debt trap.
Further, this can have a negative impact on your credit score, as if you do not make timely payments you risk going into default. Not only does this impact your creditworthiness, but a debt trap means that you will over a period of time wind up spending more than your means.
So do exercise caution when opening those new card accounts, and use them well.
With this information, not only are the most common credit card myths debunked, but you can now manage your credit better and establish a strong credit history. While you can use a credit card without any worry – and finally make that often-dreamt of purchase – do be prudent in your usage. Making timely payments is the key to good credit health when using a credit card.