Think Before Sweeping – The Hindu

Credit cards have many advantages. However, they can also cause major financial hardship when used carelessly.

Credit cards have many advantages. However, they can also cause major financial hardship when used carelessly.

Sachin Vasudeva

A credit card offers multiple benefits in the form of higher purchasing power and interest-free periods, as well as rewards on use.

However, it can also cause major financial hardship, largely due to financial indiscipline or a simple lack of awareness.

Here are the seven most common mistakes you can make when using your credit card.

Missing on-time payments

Although credit cards give you greater purchasing power, they also come with the responsibility of repaying outstanding amounts on time. Lack of discipline in timely repayment of your unpaid card bill can be perhaps the greatest folly when using a card.

Not only would you be subject to high late payment fees and finance charges, but regularly missing your payment can have a big impact on your credit score. Non-payment and even late payment of your credit card bill is reflected in your credit report, which can also negatively impact your chances of getting a loan or a credit card in the future.

Additionally, missing your credit card bill payment will eventually cause you to lose the interest-free period, as all new transactions will also start incurring finance charges from day one until the time you pay your bills. arrears.

Therefore, it’s essential not only to make sure you pay your credit card bills on time, but also to have the discipline to only spend what can be paid off in full, on time.

Failure of the “minimum due”

In addition to the “Total Amount Due”, card issuers also offer an option to pay the “Minimum Amount Due” by the due date, to keep the card active and avoid late payment fees. This minimum amount due is a small fraction of the total due, usually around 5%. However, by only paying the minimum due, the outstanding balance on the card begins to incur finance charges which, in the case of some cards, can be as high as 40% per year.

When you transfer the balance to the next billing cycle, finance charges will also be levied on new transactions until you pay off the entire outstanding balance. This can quickly increase your indebtedness.

ATM withdrawal

Although withdrawing money 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. It attracts three types of charges.

The first is the cash advance fee, which is typically around 3.5% of the amount withdrawn. Second, financial charges on the money withdrawn, which can reach 40% per year. And third, all new credit card transactions after withdrawing money also start incurring finance charges from day one.

This means that once you withdraw money with your credit card, you can no longer take advantage of the interest-free period on your new transactions, until you repay the cash advance. Although the cash advance fee is a one-time fee, finance charges will be levied daily until the amount is fully repaid.

If you withdraw money and don’t pay it back promptly, you may end up paying a substantial amount in finance charges. Therefore, credit card cash advances should always be considered the last resort. A personal loan or a credit card loan can be a better alternative to meet the financial requirements.

exhausting limit

If you regularly exhaust your entire credit limit, it can negatively impact your credit score, as your credit utilization rate (CUR) becomes extremely high. The CUR is a percentage of your total available limit that you are currently using.

If your CUR is high, especially when you frequently approach or exceed your credit card credit limit, you will be perceived as a credit addict, which can negatively impact your credit score. If you regularly max out your credit card, you can apply for additional credit cards or ask 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 purchase date and the payment due date.

If you pay all your dues on time, transactions made during this period do not incur finance charges. Transactions you make early in your billing cycle will be eligible for a longer interest-free period. If you have multiple credit cards with varying billing cycles, you should spread your purchases across those cards to make the most of the interest-free period, especially when making large transactions.

Making high-value purchases early in your cycle will give you more time to pay them back.

Increase in limit

Having a low credit limit on your credit card can be a big inconvenience because it limits 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. A higher limit, on the other hand, if used wisely, can be very useful.

It comes in handy in an emergency and gives you higher buying power to make the most of offers and discounts during offer periods. Increasing the limit also lowers your overall credit utilization ratio, which can positively influence your credit score.

Expiration of reward points

Most credit cards come with a rewards points program where cardholders earn rewards points, and the points earned can be redeemed for gift certificates, merchandise, or statement credit.

However, rewards points have expiration dates, usually 2-3 years from the date they were earned. Your monthly credit card statement contains details of the points that are about to expire during that month. It’s important to keep track of when reward points expire so you don’t miss out on this benefit.

(The author is Associate Director and Business Leader (Maps), Paisabazaar.com)

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