Paid just the minimum balance on you credit card? You will still be penalised

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Credit Cards provide a wide range of benefits, from higher purchasing power to rewards, discounts, cashback on spends etc., leading to an increased number of takers. However, there are several misconceptions around credit cards that could not only be hindrances towards maximizing benefits from your card, but also cause financial distress.

Here are some common myths around credit cards that one needs to be aware of.

By paying the minimum amount due, you will not incur charges

If you cannot pay the total amount due on your credit card, banks give you the option to pay a minimum amount and continue using the card. This is usually 5 percent of the total due plus any EMIs, fees and charges. Paying the minimum due is also not classified as ‘missing’ the payment which means it will have no immediate impact on your credit score.

However, when you pay only the minimum due instead of the total amount due, the remaining unpaid balance accrues finance charges which can range from 1.99 percent p.m. to 3.5 percent p.m. or higher. Another important point to note is when you have unpaid balance on your card, you are not eligible for the interest-free period. This means all new purchases you make through your card will start accruing interest from the first day. Since credit card finance charges are quite high, even a small unpaid balance can quickly rise to a big debt.

Cash advance via Credit Card is like taking cash with your debit card

Like your debit card, you can use your credit card also to take out cash from an ATM. This credit card cash advance, also known as cash withdrawal feature on credit cards, is the costliest form of debt. Depending on the type of card, you will have to pay an interest of 1.99 percent p.m. to 3.5 percent p.m. Some banks have set an even higher rate of interest for cash advances.

Plus, there is a flat fee of Rs 200-500 which is also added to your bill. Moreover, cash advances do not qualify for the interest-free period, which means interest charges apply from the date of withdrawal. Any new purchases you make will also not be eligible for the interest-free period.

Lifetime-free credit cards offer the best value

While it is good to have a credit card with no annual fee, the overall value of the card depends on how well it aligns with your spending habits. For example, Amazon Pay ICICI Credit Card is a lifetime-free card, but it may not be the best choice for a frequent traveller. A card that is designed to offer travel benefits like air miles, complimentary lounge access, hotel benefits, etc. will be a better choice for travellers, even if it comes with some annual charges.

If you choose the right credit card, the benefits will usually outweigh the annual fee. Moreover, cards with annual fees usually have a waiver condition so if you reach the defined threshold, your fee will be waived off or reversed. Hence, it is advisable to look at the benefits a credit card offers and its suitability to the user, rather than only the annual fee.

Closing unused credit card accounts improves your credit score

It is a smart move to keep your unused credit cards with zero balance active. The available credit limit will reduce your overall credit utilization ratio, which is good for your credit score. A low credit utilization ratio shows a lifestyle not reliant on credit. On the other hand, if you close your credit card account, it reduces your total available credit, which can negatively impact your credit score.

Also, closing old credit cards can reduce the average age of your credit history. A longer credit history shows more experience in handling credit, which can help your credit profile. If your unused credit card also carries a very high annual fee, it may be wise to downgrade it to a low or no fee card instead of closing the account altogether.

All credit card transactions come with 45-50 days of interest-free period.

Though credit cards offer an interest-free period of 45-50 days, the actual free credit period you get will depend on the date of making a transaction. A credit card comes with a 30-day billing cycle and another 15-20 days for making the payment due for the said cycle.

So, if you make a purchase on the first day of your billing cycle, you will be able to avail the full 45-50 days of the interest-free period, but a transaction made on the 30^th day of such cycle will be eligible for only the remaining 15-20 days of free credit. Remember, if you have unpaid balance on your card, you will not be able to avail any interest-free period unless you clear the dues in full.