While credit cards offer multiple benefits to their users, they can pose significant risks for those who lack financial discipline. If handled carelessly, they can negatively impact your financial health for a long time.
These 5 common signs are that you’re using your credit card the wrong way:
1. Consistently repay the minimum amount owed only
Many credit card holders mistakenly assume that paying only the minimum amount owed will save them heavy finance charges. Paying off the minimum amount owed would only prevent you from incurring late fees and hurt your credit score. You will still have to pay a significant finance charge of 23% to 52% per year on the unpaid portion of your credit card bill. In addition, non-refunding of credit card contributions will result in the elimination of the interest-free period on new card transactions until the entire unpaid portion is refunded.
If you are unable to reimburse the full credit card fee, convert the unpaid component to an IME. The interest rate for EMI conversions is much lower than the finance charges levied on unpaid dues. This option offers repayment terms of 3 months to 5 years, allowing cardholders to repay the unpaid credit card bill at a much lower interest rate in smaller installments according to their repayment capacity. What’s more, going this route even restores the benefit of the interest-free period on credit cards.
2. Withdrawal of cash by credit card via ATMs
Cash withdrawals by credit card incur a cash withdrawal fee of up to 3.5% of the withdrawal amount. In addition, card issuers also charge fundraising fees of up to 52% per annum from the day of withdrawal until redemption. Therefore, try to avoid making cash withdrawals by credit card whenever possible. In the event that this becomes completely unavoidable, be sure to pay back the full amount withdrawn as soon as possible. This would reduce the additional interest charges incurred in the form of finance charges.
3. Constant maintenance of the credit utilization rate (CUR) above 30%
CUR is the percentage of the total credit limit that you are using. Since lenders generally consider those with CUR above 30% to be credit-hungry in nature, credit bureaus may also lower the credit rating of those above the 30% credit card level. So, limit your overall credit card to less than 30% of your total credit card limit.
If you frequently exceed this limit, ask your existing credit card issuer to increase your credit limit or request an additional credit card. Going for either of these options would help lower your CUR, provided you don’t disproportionately increase your credit card spending after getting a higher credit limit.
4. Ignore the expiration date of reward points
Depending on the reward points program offered on the credit card, cardholders can use the accumulated reward points to purchase gift certificates, convert them to airline miles, purchase products at certain points of sale or online partners. , or by adjusting them against overdue card bills. However, the accumulated reward points of most credit cards expire within 2-3 years of being credited. Very few credit card issuers offer cards without expiring reward points. Therefore, you should always closely monitor the validity of loyalty points, as well as the terms and conditions associated with their redemption.
5. Decline the offer to improve the credit limit
Many credit card holders often avoid increasing their credit card limit due to fear of overspending and the possibility of falling into the debt trap. However, be aware that if used wisely, it can help improve your financial health. Therefore, you should consider these credit limit enhancement offers whenever offered to you by the card issuer.
It would improve your financial ability to deal with financial emergencies or to incur higher expenses at festivals or any important occasion. Also, keep in mind that an improved credit limit can lower your CUR, which can help improve your credit score and, therefore, your future loan and credit card eligibility.
(The author is Senior Director, Paisabazaar.com)