A lot of people are very skeptical about loans and credit, and will totally disregard any loan product. This perception also extends to credit cards. Therefore, it is important to consider the common misconceptions or myths surrounding credit cards and explain them.

Myths are basically misconceptions or misunderstandings, a widely held but false belief or idea. In this post we are going to clarify top 10 myths you must have or have heard about credit cards and provide you with the information necessary to make your informed decision.

  1. A new credit card won’t affect your credit score

Some people think that their credit scores are only affected after they actually use a new credit card they applied for. However, your score will be impacted as soon as you apply for new credit, regardless of whether you are approved or not. In fact, applications for new credit count for 10% of a consumer’s overall credit score. As a result, applying for new credit too frequently can negatively impact your credit score. When you apply for and receive a new credit card, two things happen that affect your credit score. First, there is a request made for your credit history called a "pull." One pull now and then has a negligible effect on your credit, but too many pulls in a short period of time give the impression that you are facing financial difficulty. This applies to traditional loans as well. Which is why revolving credit options are better because you only apply once and enjoy the benefits of the credit as long as you satisfy the conditions of your credit card provider

2. A credit card balance  is required to build your credit score

Many young people who are using credit cards as a tool to establish their credit footprint think that they have to carry an unpaid balance on their card to do so. But this isn’t the case. It’s usually better to pay off your balance in full each month since this will lower your debt-to-credit ratio and possibly increase your credit score. Carrying a balance on your credit card doesn't help your credit score, it only has the potential to hurt it if it is left unpaid in the long run. It could end up becoming expensive over time paying interest. Not to mention, it's a waste of money to pay interest on your balance if you can afford to pay off your credit card bill in full each month.

3. If you pay less than the minimum dues on your credit card it won’t count as missed payment

Any monthly payment that’s less than the full minimum payment due will be reported by your credit card issuer as a missed payment, which could drag down your credit score. Therefore, it’s important to pay at least the minimum amount due on your credit card account by the due date each month. An even better strategy is to pay off the full billable amount at end of your billing cycle and to not spend more than you can pay off monthly. For the sake of your credit score, always pay on time.

4. You appear debt-free if you pay your balance in full

The smartest way to use a credit card has always been to pay your credit card bill in full every month to avoid paying accumulated interest. From a practical standpoint, the cardholder isn't incurring any debt, but that is not how the credit agencies will report it. Your credit card issuer will report your current balance as debt, even before you have received your statement. If your balance is reported the day after you have paid your statement in full, the credit card issuer will still report as debt all of the charges made since your last statement period ended. It is important to note that appearing debt-free is not also great for your credit score in the long run. If you pay your monthly bills in full or keep your credit utilisation ratio low, your credit score should not be affected negatively.

5. Old/unused credit cards must be closed

Credit utilisation comes into play here as well. The percentage debt/consumption you have versus the total credit available to you across all cards or loan accounts is used to calculate your overall credit utilisation. A good practice is to maintain card utilisation at about 30%. Lower debt usually suggests a sound financial position, ergo higher credit scores. Just as it helps to expand the pool with a new card, closing an old one would reduce your total available credit, and proportionately increase your credit utilisation. Also, old accounts are treated favourably when calculating credit scores as they hold weightage in the ‘length of credit history’ category.

6. Your income has an impact on your credit score

Your salary and income are considered measurements of your capacity to pay bills, NOT your potential credit risk. "Income isn't even on your credit reports so it can't impact your score," Ulzheimer says, "Wealth metrics aren't considered by credit scoring models." While it's good to know that the size of your paycheque has no influence on whether you have good or bad credit, you should know what does impact your score. Variables include your payment history, amounts owed, length of credit history, new credit (how often you apply for and open new accounts) and credit mix (the variety of credit products you have).

7. Thinking a good credit score means you are rich

Credit scores are just a measure of your risk (whether you pay your bills on time and in full). A good credit score means you are a good credit risk. A low score means you're a poor risk. That's all they mean. Having a high salary does not guarantee a higher line of credit, but if you update your income with a card issuer to a higher amount, you may see an increase in your credit limit, which could be positive for your credit utilisation ratio.

8. Thinking your employers can see your credit score

When it comes to applying for a new job, people often think prospective employers can see their credit score. While they can pull your credit report, the type of credit report that employers have access to does not include your actual credit score. What employers do see when they run a credit check is your debt and payment history so they can look for any signs of financial distress.

9. Thinking you don’t have to worry about credit scores until you are older:

The minimum age at which you can apply for credit is 18 and that is when you should start worrying about your credit score. Financial experts recommend young people start building credit as soon as possible. The length of your credit history is a big factor in your credit score, so the sooner you establish your credit footprint, the better. You can start building your credit score with BOON CREDIT CARDS, it is easy to apply even as a beginner.

10. Thinking a high credit card limit is a bad thing

In most cases, a higher limit indicates that credit-reporting agencies consider you a favourable risk. But if you routinely use a large percentage of your available credit, they may interpret it to mean just the opposite—that you’re overextended—and a less favourable risk. Having a higher credit limit that’s managed appropriately may have a positive impact on your credit score. To help lower utilisation, if you’ve had a credit card for a while and have demonstrated consistent, on-time payments while staying at 30% or less of your available credit limit, you may want to ask the credit card provider to raise the limit.

In Conclusion, Credit cards are used widely, but there is a lot of misinformation going around about them. By understanding the facts, you can make the best decisions about your use of these powerful financial instruments.

At Boon, we provide easy access to revolving credits with generous limit. We intend to launch soon, please join our waitlist and be the first to know.

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