Credit cards have many benefits. However, they can also cause major financial trouble if used unintentionally.
Credit cards have many benefits. However, they can also cause major financial trouble if used unintentionally.
Sachin Vasudev
A credit card comes with many benefits in the form of high purchasing power and interest free period as well as rewards on usage.
However, it can also lead to major financial crisis, mainly due to financial indiscipline or lack of awareness.
Here are the seven most common mistakes you can make when using your credit card.
non-payment on time
While credit cards give you the power to spend more, they also bring with you the responsibility of paying the outstanding amount on time. Lack of discipline in making timely payment of your outstanding card bill is probably the biggest folly while using the card.
Not only will you be charged hefty late payment fees and finance charges, but regularly missing your payments can have a serious impact on your credit score. Non-payment of your credit card bills and even late payments are reflected in your credit report, which can adversely affect your chances of getting a loan or credit card in the future.
In addition, defaulting on your credit card bill payments will eventually cost you the interest-free period, as all new transactions start charging finance charges from day one until you pay off your outstanding balance. Will go
Therefore, it is important to not only ensure that you pay your credit card bills on time, but only spend what can be met on time.
‘Minimum Payable’ Piffle
Along with ‘Total Amount Due’, card issuers also provide an option to pay the “Minimum Amount Due” on or before the due date to keep the card active and avoid late payment charges. This minimum amount due is a small fraction of the total amount payable, usually around 5%. However, on payment of only the minimum due amount, the outstanding balance on the card starts attracting finance charges, which can go up to 40% p.a. in case of some cards.
When you change the balance to the next billing cycle, a finance charge will also be levied on the new transaction until you have paid the entire outstanding balance. This can rapidly increase your debt burden.
ATM Withdrawal
While withdrawing cash from an ATM using your credit card may seem like an easy solution to your cash needs, it is one of the most expensive forms of borrowing. There are three types of charges on this.
FIR is a cash advance fee, which is usually around 3.5% of the amount withdrawn. Second, finance charges on cash withdrawals, which can go up to 40% p.a. and third, all new transactions done through credit cards after you withdraw cash, start levying finance charges from day one. Is.
This means that once you withdraw cash using your credit card, you cannot enjoy the interest-free period on your new transactions until you pay off the cash advance. While the cash advance fee is a one-time fee, the finance charge will be levied every day until the amount is paid in full.
If you take out cash and don’t pay it off quickly, you could end up paying a large amount in finance charges. Therefore, cash advances on credit cards should always be considered as a last resort. Personal loan or loan against credit card can be a better option to meet the financial requirements.
exhausting range
If you regularly exhaust the entire credit limit available to you, it can adversely affect your credit score as your credit utilization ratio (CUR) becomes very high. The CUR is a percentage of your total available limit that you are currently using.
If your CUR is high, especially when you are repeatedly exceeding or violating your credit card credit limit, you will be considered a credit dependent and this can negatively affect your credit score. Is. If you are maxing out your credit card regularly, you can apply for an additional credit card or request your card issuer to increase your credit limit.
interest free period
One of the most important features of a credit card is the interest free period. This is the period between the date of making the purchase and the due date of the payment.
Transactions made during this period do not attract finance charges if you pay all your dues on time. Transactions made by you at the beginning of your billing cycle will be eligible for a longer interest free period. If you have multiple credit cards with different billing cycles, you should spread your purchases across these cards in such a way that you get the most out of the interest-free period, especially when making big-ticket transactions.
Making high-value purchases early in your cycle will give you more time to pay them off.
limit increase
Having a low credit limit on your credit card can be a big disadvantage as it restricts your purchases, even if you have sufficient repayment capacity. It also limits your chances of earning higher rewards through higher spending and pushes you towards higher CUR. On the other hand, a higher limit, if used judiciously, can be very useful.
This comes in handy in times of emergency as well as gives you a high purchasing power to make the most of deals and discounts during the offer period. The increased limit also lowers your overall credit utilization ratio which can have a positive impact on your credit score.
reward point expiry
Most credit cards come with a reward points program, in which cardholders earn reward points, and accumulated points can be redeemed for gift vouchers, merchandise or statement credits.
However, reward points have expiration dates, usually 2-3 years from the date they accrue. Your monthly credit card statement contains the details of points that are due to expire in the said month. It is important to keep an eye on the expiry of the reward points so that you do not miss out on this benefit.
(The author is Associate Director and Business Head (Cards), Paisabazaar.com)