While credit cards bring a number of added benefits for their customers, they can lead to substantial dangers for these lacking economic discipline. If handled carelessly, they can adversely influence your economic overall health for a lengthy time to time.
These 5 typical indicators indicate you are utilizing your credit card the incorrect way:
1. Constantly repaying the minimum quantity due only
Many credit cardholders make a incorrect assumption that repaying only the minimum quantity due would save them from paying heavy finance charges. Repaying the minimum quantity due would only save you from incurring late payment charges and taking a hit on your credit score. You will nevertheless incur hefty finance charges of 23%-52% p.a. on the unpaid element of your credit card bill. Moreover, non-repayment of credit card dues leads to the withdrawal of the interest-absolutely free period on fresh card transactions till the whole unpaid element is paid off.
In case you are unable to repay the whole credit card dues, convert the unpayable element into EMIs. The interest price of EMI conversions are significantly decrease than finance charges levied on unpaid dues. This solution provide repayment tenures of 3 months to 5 years, enabling card holders to repay unpayable credit card bill at significantly decrease interest price in smaller sized tranches as per their repayment capacity. Moreover, opting for this route even reinstates the advantage of interest-absolutely free period on credit cards.
2. Cash withdrawal utilizing credit cards by way of ATMs
Cash withdrawals utilizing credit cards attract money withdrawal costs of up to 3.5% of the withdrawal quantity. Additionally, card issuers also levy finance charges of up to 52% p.a. suitable from the withdrawal day till their repayment. Hence, attempt to stay away from creating money withdrawals by way of credit cards to the extent feasible. In case it becomes entirely unavoidable, make sure you repay the whole withdrawn quantity as early as feasible. Doing so would lessen further interest expense incurred in the type of finance charges.
3. Constantly maintaining credit utilization ratio (CUR) of more than 30%
CUR is the percentage of total credit limit utilized by you. As lenders ordinarily take into consideration these with a CUR of more than 30% to be credit hungry in nature, credit bureaus may well also lessen the credit score of these surpassing the 30% level of credit card. Thus, restrict your general credit card inside 30% of your total credit card limit.
In case you breach this limit often, either request your current credit card issuer to improve your credit limit or apply for an further credit card. Opting for either of these alternatives would assistance you lessen your CUR, supplied you do not boost your credit card spends disproportionately following getting a greater credit limit.
4. Ignoring reward point expiration date
Depending on the reward point system provided on the credit card, cardholders can use accumulated reward points for obtaining present vouchers, converting them into air miles, acquiring goods at choose merchant outlets or on the net partners, or by adjusting them against the outstanding card bills. However, accumulated reward points of most credit cards expire inside 2 to 3 years of their credit. Very couple of credit card issuers provide cards with no reward point expiry. Hence, you ought to usually hold a close watch on the validity of reward points, as properly as the terms and situations linked with their redemption.
5. Turning down credit limit enhancement provide
Many credit cardholders usually stay away from escalating their credit card limit owing to the worry of overspending and the possibility of landing into a debt trap. However, note that if judiciously utilized, this can assistance you increase your economic overall health. Hence, you ought to take such credit limit enhancement provides into consideration anytime it is provided to you by the card issuer.
Doing so would improve your economic capacity to face economic emergencies or make greater spends in the course of festivals or any essential occasion. Also, bear in mind that an enhanced credit limit can lessen your CUR, which can assistance increase your credit score and thereby, your future loan and credit card eligibility.
(The author is Senior Director, Paisabazaar.com)