4 potential Credit Card risks and key strategies for mitigating them

Credit cards function as a form of short-term borrowing that allows you to avoid interest charges, provided that you settle your balance promptly. Nevertheless, similar to other borrowing methods, they entail specific risks if not managed responsibly. By exercising discipline in your card usage and ensuring timely payments, you can mitigate these risks and maximize the benefits of your credit cards.

Below are the primary risks linked to credit card usage and strategies for their avoidance.

1. High interest rates

Credit cards represent one of the most expensive methods of borrowing, as they typically impose high interest rates that can range from 30% per annum to 52% per annum. It is important to note that interest is only charged when the full amount due is not paid or in the case of cash withdrawals. If the total outstanding balance is not settled, any new transactions will begin to accrue interest immediately, thereby nullifying the interest-free period.

While some individuals may find themselves incurring interest charges due to financial difficulties, a common misconception among many cardholders is that paying the ‘minimum amount due’ is sufficient. In reality, making only the minimum payment merely prevents late payment penalties, while the interest on the remaining balance and new purchases can far exceed any savings from avoiding late fees.

Also Read: Consumer Alert! 6 types of people who MUST NOT get a credit card

What to do?

It is, therefore, strongly recommended to pay the full amount due on your credit card by the due date. If full payment is not feasible, consider converting the outstanding balance into equated monthly installments (EMIs) to manage payments over several months. Alternatively, obtaining a personal loan or utilizing a balance transfer option can also be more cost-effective than incurring finance charges. Additionally, it is advisable to refrain from cash advances, as these transactions incur interest charges from the very first day.

2. Excessive Spending

Credit cards provide enhanced purchasing capabilities, which can easily result in excessive spending, particularly for individuals prone to indulgence. These cards offer reward points, cashback, and discounts with well-known brands, potentially motivating consumers to make unnecessary acquisitions. Consequently, this behavior may lead to expenditures that exceed one’s ability to repay.

What to do?

To prevent overspending, it is essential to maintain rigorous financial discipline. Regularly review all credit card statements to identify your primary spending areas and determine what can be curtailed. Additionally, monitor the billing cycles of each card to optimize the benefits of the interest-free period. If resisting the temptation to overspend proves challenging, consider leaving your credit cards at home when going out and utilizing alternative payment methods such as UPI, mobile wallets, or cash to mitigate the risk of excessive spending.

3. Fraudulent Transactions

Fraudsters can obtain your credit card information through deceptive emails or phone calls, subsequently using the card for unauthorized transactions. They may also engage in skimming, which involves duplicating your card at point-of-sale terminals. Additionally, some may resort to identity theft to acquire a credit card in your name and with your PAN.

What to do?

To mitigate the risk of credit card fraud, it is essential to remain vigilant and utilize your card responsibly. Avoid sharing sensitive card information with anyone. When making purchases at a point-of-sale terminal, ensure that your card is swiped in your presence and do not relinquish it to others. Regularly review your credit card statements and credit reports to identify any fraudulent activities or instances of identity theft. Should you discover any discrepancies, promptly notify your card issuer or credit bureau.

4. Negative impact on credit score

Credit card payment histories are reported to credit bureaus. Instances of late payments, missed payments, or defaults on any credit card can result in a decrease in your credit score. Additionally, consistently reaching the credit limit on your cards indicates a heavy reliance on credit, which may also prompt credit bureaus to lower your score.

What to do?

When utilized judiciously, credit cards can enhance your credit score. The most effective strategy is to ensure that all bills are paid in full by their respective due dates. If you often overlook these deadlines, consider establishing automatic payment instructions or setting reminders for each card’s due date.

Furthermore, it is advisable to refrain from maxing out your credit cards. If maintaining a low utilization ratio proves challenging, you might consider obtaining an additional credit card or requesting an increase in the limit of your current card. You should, therefore, avoid applying for multiple credit cards simultaneously, as this can negatively impact your credit score. Instead, assess your eligibility, determine if it aligns with your needs, and apply accordingly.

Apart from these, it is also advisable to select a credit card that aligns with your lifestyle, as this will enable you to maximize value on frequent purchases. Aim to secure the greatest benefits at the lowest cost, rather than choosing a card solely based on introductory bonuses or pre-approved offers.