Reckless use of credit card can cause unimaginable damage

BankBazaar.com CEO Adhil Shetty on ways to use plastic money to avoid piling up of interests

A credit card is like an unsecured loan and carries a huge interest on unpaid dues. Although a credit card has many advantages, reckless and unmindful usage can cause greater damage to your finances than you can imagine. While most of us have a credit card, very few of us actually understand its pros and cons well enough to effectively use it.

While interest rate charged by banks is the most important factor which we often look at in a credit card, remember that there are several other factors to be kept in mind while using a credit card. A few such things to be considered are:

Annual fees charged on credit card: Very often, credit card companies offer cards that have zero annual fees in the first year, but get charged from the second year onwards. Although this amount may not be huge compared with your credit limit and the potential to spend, it is nevertheless important to have clarity on this aspect to avoid shocks in the second year of your card usage. Sometimes annual fees are waived only if you spend a certain amount on the card during the year. This clause may not be very useful if you restrict your credit card usage only on important expenses.

Other fees and charges: Hidden fees and charges are one of the key areas discussed when the negative aspects of credit cards are discussed. Credit card companies usually divulge information of all possible fees and charges on the use of the card. However, customers do not completely understand the meaning behind these charges and it is often misunderstood resulting in unexpected expenses. Understand the meaning of all possible fees and charges from the credit card company official before you sign the dotted lines.

EMI scheme on credit card: When Rajesh purchased a laptop for R35,000, he realized that it is difficult for him to shell out the entire amount in one go. So he opted for an equated monthly instalment (EMI) scheme offered by his credit card company. However, he didn?t bother to understand the accompanying conditions. As a result, he had to pay a hefty amount on interest to the bank. Moreover, in case of a missed EMI payment, he will have to pay both the interest on the EMI amount and the interest on overdue balance on his card. Thus, it is better to avoid EMI route whenever possible. If you have to opt for it, remember to understand the conditions and penalties associated with it.

Terms and conditions of card: Banks offering credit cards have a document called ?most important terms and conditions?, most often displayed on their websites. When you apply for a credit card, make sure you have read these terms and conditions. Also make sure to read the credit card application form and agreement before you sign the same, as negligence can prove to be costly at a later stage.

The concept of minimum amount due: When Sheela received her credit card bill, she saw that the total amount outstanding was R25,000, but the minimum amount due was R1,000. Thinking it was sufficient to pay the minimum amount due, Sheela paid only R1,000. When she received the next month?s bill, she was in for a rude shock to see a hefty amount charged as interest on the unpaid amount (that was R24000). Interest on the unpaid amount ranges from 2% to 3.3% per month. If you pay only the minimum amount due every month, it will result in a credit ballooning, which will result in you paying more interest than the total amount outstanding on your card in a very short span of time.

Cards claiming to give you insurance benefit: Some cards offer you insurance cover in case of an eventuality. However, remember that you must always choose your card based on your credit needs, interest rate charged and other benefits, and not based on the insurance cover offered. Moreover, the cover offered will more often than not, be insufficient to cover your needs. So keep your credit needs and insurance needs separate.

Avoid borrowing cash: A credit card is primarily for you to purchase things on credit. Therefore, a credit card charges heavily when you wish to borrow cash on it ? with interest rates ranging from 2% to 3.5% on the advanced amount. Hence, it?s always better to avoid borrowing cash on your credit card, as it is expensive.

Security aspects of your card: Despite the growing rate of credit card frauds, many people do not give importance to the security aspects of the card. Remember to sign at the back of the card as this is an authentication that you are the owner when you sign for your purchases. Do not divulge your PIN and password, as these can be easily misused by fraudsters. Activate SMS alerts on your card to keep track of your transactions and instantly detect fraudulent transactions. Inform the loss of card and any irregular transaction to the credit card company immediately and keep a record of all your transactions and correspondence.