Credit cards, for most individuals, seem like the natural logical progression of adult financially independent life. While there may be pros and cons of having a credit card, fact is they are of immense convenience and help. However, we are also making some cardinal mistakes in the way we use our cards. Here are a few commonly made credit card mistakes:
1. MAXING OUT
Yes, a credit card allows you to pay for luxurious products that you probably won’t be able to afford with one month’s salary, but don’t be in a rush to spend the entire credit you are given. Ideally, you should use only 30-40 per cent of your credit limit; say your credit card limit is Rs 50,000, you should be spending Rs 15,000-20,000. Don’t be tempted to spend the entire amount only because your bank is allowing you to. A higher credit utilisation (using higher limit of the credit provided to you) lowers your CIBIL score which in turn lowers your chances of getting loans easily.
2. PAYING MINIMUM DUES
Most new credit card users get elated on seeing how little an amount they have to pay in Minimum Payment Due. However, that’s a vicious cycle you don’t want to enter, yet most individuals end up falling prey to it. By paying minimum amount, you are only avoiding late payment fees to the bank. Note, if you pay less than minimum amount, then bank will still levy late payment fee.
If you continue paying minimum amount only for next few cycles, you will keep accumulating the principal amount and the interest as well. This is compound interest working against you. If you’ve purchased something, its only logical that you should pay the entire amount back.
3. NOT KNOWING TNCS
Banks sell us credit cards by painting beautiful pictures where we can sip mimosas and sangrias without a care for the world. The reality, for most of us, is quite stark. Most of us work very hard to earn our salaries or business income and hence it’s only fair for us to know what product is being sold to us. You must know your card’s billing cycle, the interest levied on late payments, whether your card attracts any annual membership charges etc.
4. PAYING AFTER DUE DATE
This should be a no brainer. By paying your dues later than the three days’ grace period as provided by the RBI, you are increasing the time it’ll take to payoff your debt while also attracting extremely high annual interest rates between 35 to 40 per cent on your total outstanding amount.
5. CASH AGAINST CARD
One must, at all costs, refrain from using a credit card to withdraw cash at ATMs because it attracts the highest interest charges. Not only are you charged separately for every transaction, but the interest starts adding up the day you swipe your card at an ATM.
For example: A leading bank chargers between 2.5 and 3.5 per cent monthly or 30 to 42 per cent annually for cash withdrawal against a credit card. It additionally charges 2.5 per cent on the advanced amount as transaction fees.
6. IGNORING BILLS/DUES
Most credit card users on having unfortunate experiences with credit card bills, stop thinking about the credit card and using it altogether. The rationale is that if you don’t use it, your problems will go away. Unfortunately, that is far from the truth. By not actively approaching your credit card to pay off your dues, you are doing more harm than good as the interest never stops being added to the existing amount. This means, sooner or later you will have to pay back the entire amount due, inclusive of interest charges. So the quicker you pay your bills, the faster you’ll be debt free. It’s better to close the credit card if you don’t intend to use it.
If you are alarmed after reading this article, don’t be. The entire effort is to inform you so that you can maximise credit cards to your benefit without falling into the debt trap. Don’t forget that there’s no free lunch and that banks are into the business for profit making.
Streamline your expenses, decide what purchases are urgent and one should be able to distinguish between your needs and wants. With some discipline and attentiveness, you will be able to schedule your payments easily and make the most of your credit card.
