Credit cards today have become a necessity in our daily financial life. From getting easy credit to meet our regular expenses to be equipped to handle immediate financial emergencies, and earning attractive reward points and cash back offers on the way, credit cards have made our lives a lot easier. However, the financial power of credit cards is accompanied with great responsibility. One wrong step can have serious consequences on your financial health. Awareness on these credit card mistakes can help you maintain the much-needed financial discipline while using them:
Not paying the credit card dues on time: While most card users who fail to pay their dues on time do so due to paucity of funds, a large number also fail due to their sheer carelessness. Failing to pay the outstanding by the due date not only attracts hefty late payment fee and interest charges (@ 25–45% p.a.), it also reduces your credit score. To ensure regular payment by the due date, set standing instructions on your savings account to deduct the entire outstanding amount on a pre-determined date, which is before the regular due date, every month.
Paying minimum due amount only: Many cardholders just pay the minimum due amount believing that rest of the outstanding amount can be paid later without incurring any interest on it. However, paying the minimum amount due just saves you from paying the late fee. You will still continue to accrue the interest on the rest of the outstanding amount at the applicable interest rate.
Using your full credit limit: Credit bureaus consider your credit utilization ratio while calculating your credit score. Credit utilization ratio is the ratio of your existing credit outstanding balances and the total credit limit available on all your credit cards. As lenders consider credit utilization ratio of over 40% as a sign of credit hungriness, frequent breaching of this level will reduce your credit score and may adversely affect your loan eligibility in future. Instead, ask your credit card issuer to increase your credit limit or avail additional credit cards to increase your credit limit.Using credit card to withdraw cash: Banks charge a cash advance fee for withdrawing cash with your credit card. This fee can go up to as high as 2.5% of the withdrawn amount. Moreover, unlike other credit card transactions, cash withdrawals attract finance charges right from the day of the cash withdrawal till the date of repayment. Thus, withdraw cash through your credit card only when it is totally unavoidable and repay the entire amount as soon as you can.
Applying for too many credit cards within a short period: Every time you apply for a credit card, the card issuer will fetch your credit report from the credit bureaus. These credit report requests raised by card issuers are considered as hard enquires and are reported in your credit report. Too many hard enquires within a short period of time will depict you as a credit hungry person and raise doubts about your debt repayment capacity. This will lead the credit bureaus to reduce your credit score.
Not analyzing your spending patterns before selecting a card: Each credit card focuses on specific type of transactions by offering higher reward points, discounts or cash back offers on them. Analyzing your spending pattern will allow you to choose a card that offers maximum benefits on your expenditures. For example, if you regularly commute to your office in your car, then using a fuel credit card will offer more benefits on refueling than a shopping or a plain-vanilla rewards card. Also ensure that your savings through credit card transactions are higher than the annual maintenance charges levied by your credit card issuer.
Not redeeming your reward points: The reward points of most credit cards come with predetermined expiry periods. For example, the reward points of HDFC credit cards expire after 2 years from the date of transaction while the reward points of Axis Bank credit cards have to be used within 3 years of earning them. Make sure to go through the terms and conditions of your credit card’s reward point program and redeem them before their expiry.
Credit cards can be a great tool for making payments and reducing your transaction cost. Visit online loan aggregators to compare the various credit card options available on your credit score. Some aggregators also provide the expected savings generated through each credit card. Ensure to spend within your means and pay your entire dues within the due date. Avoid credit cards for making cash withdrawals and do not spend beyond 30–40% of your total credit card limit.The writer is VP & Business Head - Payment Products of Paisabazaar.com