Credit cards are becoming an increasingly popular payment tool, due to the convenience and rewards they offer. The comfort of buying now and paying later is catching up with consumers, especially among the millennials, who usually ensure they make the most of the benefits their credit cards have to offer. However, if used carelessly, credit cards can land you in a big financial crisis. Here are some tips on how to use credit cards judiciously without risking any kind of financial trouble:
1. Choose the credit card which suits your spending needs: Since benefits and rewards endowed by each credit card are different, consumers must choose a card which will provide them with the maximum benefits. So, first identify your spending pattern, and then look for credit cards which meet your needs the best.
For example, if you are a frequent traveler, choose a travel credit card that offers air miles, hotel vouchers and lounge access at airports as rewards.
2. Buy what you can repay: Since credit cards offer the comfort of buying without paying instantly, many consumers fall into the debt trap by over spending and then struggling to make repayments. While your credit card may have a high credit limit, know how much you can repay, and keep your spends within that limit.
3. Pay your bills in full and on time, always: Credit cards do not charge interest if you make the payment of outstanding debt in full and on time. Though you get the option to make minimum balance payment against your credit card dues, remember paying only the minimum due is dangerous as you might end up paying huge interest, making you fall into a debt trap.
Also, late payment of credit card dues is catastrophic in several ways. Firstly your credit score gets hampered. Secondly, you will have to make late fee payment each time you delay the payment. Also, some banks charge an extra fee if the ECS of the payment is not accepted.
4. Watch your credit utilization ratio: Credit utilization ratio is the proportion of total credit limit that is utilized by you. Credit bureaus like Cibil consider a credit utilization ratio of above 40% regularly as a mark for credit hungry behaviour. Breaching this level can lower your credit score, which may adversely impact your chances of getting loans in the future.
If you breach this level frequently, request your credit card issuer to increase your credit limit, or apply for an additional credit card that suits your needs and lifestyle.
5. Check your credit report at regular intervals: A credit report may show wrong information due to clerical mistakes conducted by the credit bureaus or lenders, or because of illegal credit forms or transactions in your name. The way through which you can check them all is by analyzing your credit report at regular intervals. You can also take the help of online financial marketplaces to avail free credit reports on a monthly basis. This is digital, free and instant.
6. Do not keep more than 2-3 credit cards: Having more than three credit cards not only increases the propensity to spend, but it also ups the risk of theft or loss. If you genuinely require more than one card, it is best for you to own three cards at maximum – one for regular spending and the other for emergency situations. Having multiple credit cards might sweep you into debt, reducing your tendency to invest and save for a happy financial future.
7. Save while you transact: Many banks offer cash-back or reward points if the credit card is swiped for paying utility bills, movie ticket purchases, restaurant bills and more. You can earn for spending via your credit card by keeping a thorough track of deals. The earned reward points can be used to redeem against gifts on the bank’s reward catalogue.
8. Do not let your reward points expire: If you utilize your credit card actively, then you must be earning reward points. What most people fail to understand is that most credit card rewards come with an expiry date. Hence, you must track on the accumulated rewards and use it before it expires.
9. Monitor all your international transactions: If you visit abroad frequently, whether for work or holiday, you must be sure to get a credit card having low transaction and low-cost fees. Also, you must carry a travel credit card having zero transaction fees catering you with POS swipes. This is because frequent swipes through a regular credit card can pile up into a huge transaction fee.
10. Get chip cards: Due to the rise of credit card frauds, it is recommended to opt for secure credit cards like PIN cards and new age chip, instead of metallic strip cards. PIN and chip cards are less susceptible and safer as each transaction at every step requires a PIN.
(By Sahil Arora, Head-Payment Products, Paisabazaar.com)