Credit Card: Myths vs. Reality

Updated: Mar 26


This topic contains

  1. Myth 1: A new Credit Card affects my credit score

  2. Myth 2: Keeping too many cards can affect my credit score.

  3. Myth 3: I should always carry a balance on my credit card.

  4. Myth 4: Old/unused credit cards should be closed

  5. Myth 5: Paying only the minimum balance is fine

  6. Myth 6: Having a high credit card limit is not effective

  7. Myth 7: I always have to pay interest if I use Credit Card

  8. Endnote

The little plastic card in your wallet packs quite a big punch. Credit cards have become a crucial financial tool and have made life extremely convenient. In this digitalization era, plastic and virtual money are gaining immense popularity and soon will replace cash. Credit Card is easy to carry, can be used anywhere, provides funds in an emergency, and increases credit score if used wisely. Unfortunately, there are many misconceptions about credit cards and their usage. Let’s discuss them one by one.


Myth 1: A new Credit Card affects my credit score

Reality:

Applying for new credit results in a ‘hard credit inquiry by the service provider. Too many applications may have a significant effect on your credit score, but a single inquiry is unlikely to affect your score by more than a few points. Frequently applying for new credit can hurt your credit score, so make sure you need that new card before applying for it. Therefore, it is essential to pick the right card based on your requirement, spending habits, and the benefits it offers.


Myth 2: Keeping too many cards can affect my credit score

Reality:

People who know how to manage the card well would indeed have an advantage by holding several cards—credit card issuers tie-up with retailers, brands, and service providers to offer attractive deals to customers. Every card has different offers, discounts, and reward points on its purchases. An online retailer may give a discount on one card, while a travel portal might offer another. Having more than one card increases your chances of grabbing such deals as and when they are available. Your credit score will not be affected as the benefits will outweigh the cost.


Myth 3: I should always carry a balance on my credit card

Reality:

Many people who are using credit cards think they have to carry an unpaid balance on their cards. But it’s wrong. While making regular payments and good financial habits increases your credit score, having an outstanding balance does the exact opposite. Keeping balances on your credit card can give the wrong impression to the financial institution. And it can affect your credit score. It’s usually better to pay off your balance in full each month.


Myth 4: Old/unused credit cards should be closed

Reality:

It’s generally smart to keep old/unused credit cards instead of closing them out. Closing the account will reduce your total available credit. Think of it this way, just as it helps to get a new card, closing an old one would reduce your total available credit and proportionately increase your credit utilization. When calculating credit scores, old accounts are treated favorably as they hold weightage in the ‘length of credit history category.


Myth 5: Paying only the minimum balance is fine

Reality:

The minimum payment is the amount that you need to pay to avoid any late payment charges. While some people don’t have the funds to pay their full credit card balance each month, others only pay the minimum because they believe that’s all they need to pay to avoid interest charges. Only paying the minimum amount due is the worst financial mistake. You should always try to pay more than the minimum. If you don’t, you will have to pay interest charges, which may increase your credit card debt by a significant amount each month and each year.


Myth 6: Having a high credit card limit is not effective

Reality:

If you manage your credit cards wisely, a high credit limit can be beneficial. 30% of your credit score is based on your debt-to-credit ratio. The Debt-to-credit ratio is the amount you owe in proportion to your total credit limit. If you have a high credit limit and keep your balances low, your debt-to-credit ratio is also low, which may boost your credit score.

Last but not least:


Myth 7: I always have to pay interest if I use Credit Card

Reality:

Many people have this misconception that they always have to pay interest fees when using a credit card, even if they pay entirely their bill each month. It is not valid. The key here is that you should always pay your balance in full before it is due. This isn’t one of the credit card myths that can hurt you but knowing how credit cards work can only help you in the long run.


Endnote:

It’s crucial to understand how credit cards work to avoid falling for these credit card myths. Understanding your credit card functionality before signing up for a credit card can help you become more elegant in decision-making.


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