8 Shocking Myths about Credit cards and Credit card rewards

Many people have different opinions about credit cards. Some believe they are not good, while others see them as useful for emergencies or earning rewards. There are many myths about credit cards, but let's find out what's true and what's not!

Within this page:

1. Credit Cards Lead to Debt

2. Carrying a Balance Boosts Your Credit Score

3. Applying for Multiple Cards Hurts Your Credit Score

4. Higher Credit Limit Means More Debt

5. All Credit Cards Charge High Interest Rates

6. Reward Points are Not Worth It

7. Credit Cards are Only for the Wealthy

8. You Can’t Get Rewards on All Purchases

1. Myth-1: Credit Cards Lead to Debt

Majority of people think that credit cards can increase debt! It’s absolutely true that misuse of credit cards such as if you use the credit card for unnecessary shopping, going on vacation and partying doesn't work! If you have multiple sources of income and have a great maturity then you can use credit cards for other things. Responsible use of credit cards can actually improve your financial health.

But really credit can increase my debt? No, if you don’t pay the amount after a certain period of time then you will be in trouble and it can increase your debt!

Reality:

• Credit Management: Credit cards are a tool for managing cash flow and building credit history.

• Paying in Full: If you pay off your balance in full each month, you won't incur interest charges.

Example: If you use a credit card for INR 20,000 worth of purchases and pay it off in full when the bill arrives, you won't pay any interest.

2. Myth-2: Carrying a Balance Boosts Your Credit Score

Some think that carrying a balance from month to month helps their credit score.

Reality:

• Interest Charges: Carrying a balance means paying interest, which is unnecessary if you can pay in full.

• Credit Score Factors: Your score benefits more from paying off your balance in full each month.

Pro Tip: Always try to pay your balance in full to avoid interest charges and improve your credit score.

3. Myth-3: Applying for Multiple Cards Hurts Your Credit Score

It's a common belief that applying for multiple credit cards will significantly damage your credit score.

Reality: Applying for multiple credit cards within a short period may lead to a slight temporary decrease in your credit score due to inquiries by lenders (hard inquiries). However, if managed responsibly, having multiple cards can increase your total available credit and improve your credit utilization ratio, potentially benefiting your score in the long term.

Credit Mix: Having multiple credit cards can actually help your credit score if managed well.

What do you mean by Hard Inquiries?

A hard inquiry, also known as a hard pull or hard credit check, refers to when a lender or financial institution checks your credit report as part of their decision-making process for lending you money or issuing you credit. Hard inquiries typically occur when you apply for credit cards, loans (such as a mortgage or auto loan), or other forms of credit.

What is the credit utilization ratio?

Credit utilization ratio is the percentage of your available credit that you are currently using. It's calculated by dividing your total credit card balances by your total credit limits, then multiplying by 100.

Example: If you have a total credit limit of ₹50,000 across all your credit cards and currently have balances totaling ₹10,000, your credit utilization ratio would be 20% (10,000 / 50,000 * 100).

4. Myth-4: Higher Credit Limit Means More Debt

Reality:

Having a higher credit limit doesn't automatically mean you'll accumulate more debt. It actually depends on how responsibly you manage your finances. A higher credit limit can provide flexibility and improve your credit utilization ratio, which may benefit your credit score if used wisely and paid off regularly. It's important to budget and use credit responsibly regardless of your credit limit.

So, in summary

Spending Discipline: Your credit limit does not dictate your spending. Responsible use is key.

Credit Utilization: A higher limit can actually help lower your credit utilization ratio, which is good for your credit score.

Illustration: If your credit limit is INR 1 lakh and you only use INR 20,000, your utilization ratio is 20%, which is favorable.

5. Myth-5: All Credit Cards Charge High Interest Rates

Reality:

Not all credit cards charge high interest rates. There are various types of credit cards available, including those with introductory 0% APR offers on purchases and balance transfers. Additionally, some credit cards offer lower ongoing interest rates, especially for cardholders with good credit scores. It's essential to compare cards and understand their terms to find one that fits your financial needs and habits.

Interest Rates Vary: Interest rates can vary widely between different credit cards and issuers.

Promotional Offers: Many cards offer introductory 0% interest rates on purchases or balance transfers.

What is APR and give one example:

APR stands for Annual Percentage Rate. It represents the annual cost of borrowing money on a credit card, including interest and certain fees, expressed as a percentage of the total amount borrowed.

Example: If a credit card has an APR of 18%, and you carry a balance of ₹10,000 for a year, you would pay approximately ₹1,800 in interest over that year (10,000 * 0.18 = 1,800).

Chart Example:

6.Myth-6: Reward Points are Not Worth It

Reward points can provide significant value if you use them strategically. Many credit cards offer rewards such as cash back, travel miles, or points that can be redeemed for various benefits like gift cards or merchandise.

By maximizing your spending on categories that earn higher rewards and redeeming points wisely, you can effectively earn benefits that offset annual fees or even provide additional value. It's important to choose a rewards program that aligns with your spending habits and financial goals to make the most of your credit card rewards.

Example: If you accumulate 10,000 points, which can be redeemed for INR 5,000 worth of travel vouchers, it’s a significant benefit.

7. Myth-7: Credit Cards are Only for the Wealthy

There is a misconception that credit cards are only for the wealthy or for those with high incomes.

Reality:

• Variety of Options: Credit cards are available for a wide range of income levels and financial situations.

• Entry-Level Cards: Many banks offer entry-level cards with lower credit limits and annual fees.

Tip: Research and choose a card that fits your income and spending habits.

8. Myth-8: You Can’t Get Rewards on All Purchases

Many think that reward points are only earned on specific types of purchases.

Reality:

• Broad Categories: Most credit cards offer rewards on a wide range of purchases, including groceries, fuel, and online shopping.

• Bonus Categories: Some cards provide extra rewards for certain categories like dining or travel.

Example: A credit card might offer 2% cashback on all purchases and 5% on dining and fuel.

Summary:

Conclusion

Credit cards can be helpful if used wisely. By explaining these myths, we aim to help you understand how credit cards and their rewards work. Whether you want to improve your credit score, earn rewards, or manage money better, knowing the facts is important.

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Frequently Asked Questions (FAQs)

1. Do all credit cards charge annual fees?

•  No, many credit cards have no annual fees or offer fee waivers if certain spending thresholds are met.

2. Can using a credit card help me build my credit score?

•  Yes, responsible use of a credit card can help build and improve your credit score.

3. Are reward points really beneficial?

•  Yes, when used wisely, reward points can provide substantial value, such as cashback, travel perks, and discounts.

4. What should I do if I suspect fraud on my credit card?

•  Immediately contact your card issuer to report the fraud and take advantage of fraud protection measures.

5. Is it better to have multiple credit cards or just one?

•  It depends on your financial habits. Multiple cards can improve your credit mix and utilization ratio, but only if you can manage them responsibly.