If you believe that credit card takes a lot of money and score from you, you are one among the many that suffer this financial crisis. The truth, though, is far from what you have been thinking. There are many myths about credit card and how it may ruin you. Going by the myths may cost you heavily and hence you need to know the facts that are there for all to see.
The 7 most common myths about the card are debunked to give a clear picture of how things work here and how it affects your rating.
Myth No. 1 – Never Buy a Credit Card; It May Drown You in Debts
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- Myth No. 1 – Never Buy a Credit Card; It May Drown You in Debts
- Myth No. 2 – Using Up To Your Credit Limit Does No Bad
- Myth No. 3 – Having Credit Card Balance Gets You a Better Credit Score
- Myth No. 4 – Minimum Payments Made Makes No Negative Impact on Your Score
- Myth No. 5 – Getting a Second Credit Card Will Lower Your Credit Rating
- Myth No. 6 – Unused Closing Cards Is the Right Thing to Do For Better Points
- Myth No. 7 – Having High Credit Limit Is No Good
It is one of the most popular myths doing the rounds. The reason is obvious. Apart from those using these cards for comfort, many go for cards for the convenience of paying sometime later and this may result in unwise spending.
Credit card never drowns you in debts; it is your reckless management of funds that does the job. Here is how you handle your card to avoid debts and brighten your chances of improving your rating.
- Before you swipe your card, take the time to assess your commitments and if it is advisable to use the plastic. Remember, defaulting costs heavily.
- Budget planning gives an idea of where to draw a limit. With a budget plan, you reduce the risk of aftershocks.
- The lesser your credit utilization ratio, the better your score. It is recommended to keep it less than 30% for a good rating.
Myth No. 2 – Using Up To Your Credit Limit Does No Bad
It is great that you pay your credit card dues every month on time but that does not mean that using your maximum limit does not affect your score. While honoring your bills shows that you are a trustworthy customer, using the maximum credit limit only proves that you are a real spender and this affects your credit score. It may also cause an increase in interest rate making you dig deep into your pocket.
As mentioned above, maintaining a low credit utilization ratio helps. Here is how you do it:
- Keep an account of credit card usage.
- Get balance alerts by signing up with the issuer of your card.
- Go for a credit limit increase.
Myth No. 3 – Having Credit Card Balance Gets You a Better Credit Score
It may sound reassuring and comforting to those who are behind in payments or have balance. It is strange that how such myth came into being.
Keeping a balance can never be good. A pending payment only suggests that you are unable to pay and this will reduce your creditworthiness. Pay your dues every month so that your score is not affected. Even if you fail to pay the amount in full, pay a minimum amount to save your score from being affected.
Myth No. 4 – Minimum Payments Made Makes No Negative Impact on Your Score
Yes, it was suggested above to pay minimum but only when you are not able to pay in full. Many credit card holders believe that paying minimum will not affect their rating because they abide by the terms of payment agreed upon.
It is true that making a minimum payment will not have adverse effects directly. When you pay a minimum, the interest charged for the balance amount gets higher and by the end of the term, you will also have paid more as interest. Not only the interest, since there will not be much of a change in the amount you owe, your credit utilization ratio also may not favorably impact the credit score.
Hence, the rule is to pay in full and minimum amount can be made only when you are unable to pay the full amount.
Myth No. 5 – Getting a Second Credit Card Will Lower Your Credit Rating
It indeed does but not more than 5 points, which may not be much to lose if you have an impressive score. When you apply for a credit card, hard inquiry follows which lowers your credit score but as mentioned not more than 5 points.
For those with a poor rating, it is recommended to improve the score before applying for a second card.
To reverse the loss of points and earn some points, getting a second credit card helps in a great way. Now that you have two credit cards, you have two credit lines, which mean your credit utilization ratio goes down, of course only if you are careful with your spending. This helps to increase your rating.
Myth No. 6 – Unused Closing Cards Is the Right Thing to Do For Better Points
This myth might have found its origin in the minds of people who have a conservative approach to handling finances. They believe that any credit card not used should be closed to prevent attracting reduction in your score. Some people are of the opinion that closing a credit card shows them to be financially stable, which will help increase points.
The fact is that closing your unused cards does not positively impact your credit score. By closing a credit card, you risk lowering your loan limit available you may enjoy. It will result in an increase in your credit utilization ratio when you charge on your card or if you have already used your credit. Such increase in the rate adversely affects your score. Hence, it is never recommended to close unused cards. The best you can do is to start using the unused card.
Myth No. 7 – Having High Credit Limit Is No Good
It is one of the most common fears in people who are privileged to be given the opportunity of increasing the credit limit. But not all consider themselves privileged. They have their fears and the most important one is that their credit score may suffer because of an increase in credit limit.
To put it simply, an increase in credit limit does not negatively affect your rating. On the contrary, you may have an increase in your score. With an increase in your credit limit, if you manage to keep the expenses as they were or lower before the increase; the ratio of expenditure to available credit will decrease helping an increase in your score.
Credit cards are not as bad as they seem to be for many. It all depends on how you use the cards. Your cautious approach does not start when you avail the credit but it starts even before you apply for a card. Yes, before you decide on an issuer with whom you intend to apply for a credit card, study the market and make an analysis of the services offered by different issuers. Understand the terms and conditions involved and how a particular approach by a credit card issuer may positively or negatively impact your points.
Once your application is approved and you get the credit card keep an account of its usage. Such account management helps to keep a check in wild using and saves and improves your rating. After all, you need to have a good score to be in the unblocked books of lenders, right?