Sujata Ahlawat
Credit cards are one of the fastest ways to make purchases without worrying about a cash crunch.
As per the TransUnion CIBIL Industry Insights Report for Q3 2018, the number of consumers with access to a bank card reached an all-time high of 36.9 million in Q3 2018 and has grown by 31.7 percent year-on-year (YoY).
In line with this growing demand, lenders are keen to offer credit cards to consumers. A credit card isn't just plastic in your pocket -- it ensures you have access to credit at your fingertips, especially in case of an emergency. Careful usage and prompt payments will positively impact your CIBIL Score over time. Lenders reward credit-conscious consumers by increasing the credit limit, thus enabling you to make your financial goals come true at the swipe of a card.
However, any late or missed payments on your credit card bill can incur late payment fees and impact your CIBIL Score, in turn affecting your access to future credit when you need it. Here are six tips to ensure that you get the most out of your credit card while safeguarding your CIBIL Score:
1. Choose the right type of credit card - While you may be readily offered different cards, choose the one that suits your requirements. How often would you use a co-branded reward card? Too many credit cards add to your credit exposure/credit burden and will impact your credit score. Instead of opting for multiple cards, choose one or two cards that will limit your credit exposure and accumulate points every time you make a transaction.
2. Consider the credit utilisation limit - The lender will carefully assess your repayment ability before ascertaining your utilisation limit. However, ensure you apply your own filters and choose a card and a limit suitable to your income and repayment capability. Restricting your overall credit card spend to 30 percent of your credit utilisation limit is considered a healthy ratio. On the other hand, over-leveraging your credit utilisation limits is a strict no-no as this impacts your credit score.
3. Plan, purchase and forecast card expenses - It’s a good idea to decide which of your monthly purchases would be made with a credit card. Forecasting card expenses is also important to achieve your financial goals. Factor in any upcoming large-ticket purchases like gadgets or home appliances. Before using your credit card, consider whether you would like to opt for a consumer durable loan depending upon the interest rate. Though different lenders will have different interest rates, these are comparatively lower to the rate of interest on credit card balances. This will also help you maintain your credit card limit which you can utilize in case of an emergency.
4. Opt for 0 percent interest charged credit cards - Contemplating a large purchase or quick holiday package that can be covered by your credit card (within utilisation limits of course)? A zero percent interest card offers no-cost EMI’s on certain large purchase items on various online marketplaces where the interest amount is discounted from the price of the order. It is easier to repay and it reduces the chance of a missed payment and further reduces any possible impact on your credit score. However, read the fine print carefully and ensure the "zero percent interest" card does not include any hidden charges such as annual, processing and/or transfer fees.
5. Check for promotional emails and messages from your credit card provider - Lenders announce special offers, rates and cashback, especially during festivals and public holidays. With a bit of homework, smart planning and advance booking you can save some money with your credit card. Smart use of your credit card will help you build a good credit footprint as long as you are responsible and remember to repay the full amount on time.
6. Pay the full amount due on time, every single time - While credit card bills do provide a 45-day repayment window, it is always best to pay off the entire due amount in full by the due date. If you pay only the minimum due or do not pay at all by the due date, then the interest rate as applicable will be levied on your outstanding. Assuming the payment is not made within the grace period or the interest-free period (often between 45-60days), this interest rate can be as high as 36 percent per annum. For example, when you are revolving your money i.e., just paying the minimum due, you continue to accumulate interest charges from the first date of purchase. Whenever a payment is being made it is being offset against the first purchase. Once that is adjusted then it moves to the next purchase. In short, it follows the FIFO method. For example, if your current credit card bill is Rs 10,000 and assuming you are not spending further on the card and paying Rs 500 monthly, then it will take you as much as 3 years to pay off the entire amount. For every Rs 100 that you have spent, you have paid back Rs 175!
Good credit health begins with good credit behaviour. Choose to create and build a positive credit footprint by using your credit card responsibly. Further, track your credit portfolio carefully, and monitor your CIBIL Score and Report regularly to ensure you are eligible for the credit when you need it the most.
The author is VP and Head of Direct to Consumer Interactive, TransUnion CIBIL.
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