A Credit Card is a useful financial tool that not only provides you with better purchasing power through an interest-free period, but also helps you earn rewards and perks. Responsible use of a credit card can also help you build a strong credit score, which would help you avail the best offers on loans and other credit cards in the future.
On the other hand, reckless and irresponsible usage of a credit card can land you in a financial trap. To ensure you use your credit card effectively, here are some of the practices you should completely avoid.
Paying only the minimum amount due: When cardholders pay only the minimum amount due, which is a small fraction of their outstanding bill, usually around 5 percent, they do not need to pay the late payment charges, and they also keep their credit card active for further use, depending on the credit limit remaining on the card. However, this can lead to your debt increasing rapidly, as finance charges are levied on the unpaid amount on a daily basis. It needs to be noted that finance charges on credit cards are extremely high, going over 40 percent p.a. for some cards. Any new transactions you make with the credit card will also attract these finance charges, till the time you do not pay off the entire outstanding balance on your credit card, including the finance charges accrued.
Withdrawing cash through ATMs: Withdrawing cash through a credit card attracts not one but twin charges. Cash advance fees of up to 3.5 percent and high finance charges ranging between 23 percent and 49 percent p.a. are levied on cash withdrawal. These charges are applicable from the day of withdrawal until the repayment is done. So, if you withdraw cash through your Credit Card and do not repay it back quickly, you would end up paying high charges for the cash withdrawal. Withdrawing cash through your Credit Card should be your last resort if you are running short of funds. Opt for a loan against Credit Card or a personal loan, it would prove to be cheaper.
Maxing out your credit card limit: Using your Credit Card till the maximum credit limit available on a regular basis can impact your Credit Score, as it is seen by credit bureaus as a sign of over-dependence on credit. Ideally, it is recommended to keep your credit card spending or Credit Utilisation Ratio (CUR) to around 40 percent of your total credit limit available. In case, you cross this 50 percent CUR regularly, you may ask your credit card issuer to increase your credit limit. Alternatively, you can also apply for another credit card that suits your spending and need.
Not planning according to interest-free period: The interest-free period refers to the duration between the date of a credit card transaction and the due date of payment. This period generally ranges from 18-55 days based on your card issuer. Credit card transactions carried out during this period do not incur any charges as long as you timely repay the dues. In order to maximize the benefits, you should plan your purchases according to the interest-free period. You should make big-ticket purchases at the beginning of your billing cycle, this way, you can get more interest-free days to repay the amount. In the case of multiple credit cards, you can avail the maximum interest-free period from each of the cards by spreading your spending across the various cards.
Also read: How many credit cards should you have?