Credit cards: Here are five key myths that need to be busted | Mint

If you are set to buy a credit card, there are a slew of features that you should be aware of. There is no denying the fact that a credit card enables you to buy some time — usually 40-45 days — when you use it to buy items of necessity or luxury. It works on revolving credit which means you spend money, pay it back and borrow it again.

There is a rate of interest which kicks in when you miss out on payment. During the interest-free period, however, there is no interest rate which is applicable.

However, when you get a credit card, there are some mistakes that you could make because of the widespread myths. There are some common perceptions attached to taking a credit card.

Here we talk about the common credit card myths and try to bust some of those.

Some of the common credit card myths

1. No free money: First of all, there is no free money. Either you pay an annual fees, or you pay interest (calculated on a daily basis) when you miss out on payment.

Else, you could be inundated with adverts and alluring offers, which prompt you into buying things that you may otherwise not buy. Somehow you end up paying a price for getting a credit card.

2. Minimum due: The minimum due that you have to pay to clear the dues is not “minimum” in the true sense of the word. As a matter of fact, when you pay the minimum, you become liable to pay interest for the 45 days which were “interest free” before the due date. Your credit score could also suffer in the process.

3. Cash withdrawal limit: There is a myth that the credit limit of a credit card means that you can withdraw cash upto that level. This is not true. When a credit card’s credit limit is ₹5 lakh then its cash withdrawal limit could be far less – say ₹2 lakh. Credit limit means the limit upto which you can use credit given in the card. ‘=

When the credit limit is ₹5 lakh, you can spend money upto this amount by using the card but you definitely can’t withdraw cash upto this amount. So, the two limits are quite different.

4. Multiple credit cards: Some users think that keeping more than one credit card spoils the credit score. However, it is — in fact — good for the credit score because it brings your credit utilisation ratio down.

When you have one credit card, you end up using a larger potion of this limit. On the other hand, when you keep multiple credit cards, your utilisation (out of the total credit amount available) declines — thus helping you improve your credit score.

5. Annual fee: There is another myth relating to annual fees of credit card wherein some credit card users assume that the credit cards with ‘nil’ or low annual fee are good and the ones which charge a higher annual fee are bad. Whereas the reality is that the credit cards that have a lower annual fees could turn out to be bad if they levy a higher interest rate on the outstanding amount.