After getting drenched repeatedly during the streak of rainy days in September in Delhi, Nitish – an employee at the Ministry of Defence — decided to redeem his credit card points to buy an umbrella. He has only one credit card which, apart from giving reward points for normal purchases, gives double reward points on premium payments and that too without any convenience charges. “The card is very useful. I use it to buy goods at the CSD canteen, where cash payments have been stopped after demonetisation and only cards are accepted,” says Nitish.
But, to his dismay, Nitish found that only a limited number of electronic items were available in the catalog of that credit card and there was no mention of any umbrella or rain coat. Although Nitish makes good use of his credit card, but the urge of using credit cards to accumulate reward points only is considered a bad financial habit.
The users of credit cards should be careful of the following bad financial habits:
1. Using credit cards for rewards: The issuing authorities of credit cards try to entice customers with various reward schemes to maximise the use of credit cards. However, cardholders should remain cautious and use the card only if they need particular products or services. Because, if you purchase unnecessary things to get earn more and more reward points, you would end up purchasing even more unnecessary things just to use the reward points before they get lapsed when you find that there is no useful things in the reward catalog to buy. As said by business magnet and investor Warren Buffet, “If you buy things you do not need, soon you will have to sell things you need.”
2. Overspending on luxuries: Credit cards make purchases easy, as cardholders needn’t bear the pain to visit a bank or an ATM to withdraw and spend money. Moreover, the card may be used to purchase a thing for which you don’t have enough money in hands and rely on future earnings to pay the bill. In such a situation, you should go for the purchase only if it is very necessary. Overspending on luxuries is a very bad financial habit, which may force you to postpone credit card payments and, if not checked, it may not only hurt your credit score, but may ultimately make you bankrupt as well. So, always remember that credit cards should only be used during times of emergencies and not for luxury purchases.
3. Rolling over card payments: Banks give options to make minimum partial payments that often misled cardholders into thinking that it’s fine not to pay the bill amount in full. But remember that credit cards have ceiling interest rates. A partial payment may save you from late payment penalties, but it will still incur interest rates until you settle your balance. So, you should spend only that much through your credit card, which you can pay on or before the due date of bill payment.
4. Using EMI options for credit card dues: EMI schemes appear very attractive and easy for making high-value purchases. However, remember that there is no such thing as a free lunch. So, you need to figure out whether it’s really a good idea to convert your credit card balance into EMIs. In case you are really in a very tight financial position and about to default on paying credit card bills, it will be good for you to use the option as it is better than defaulting on your payments, which will hurt your credit score. So, unless very necessary, one should avoid EMI option, as it not only inflates the cost of the product, but also attracts additional fees and creates long-term debt. So, using the EMI option to buy a house may be justified – where cost is too high to pay out of pocket. But not for that expensive high-end mobile handset, whose 70 per cent features you may not use.
5. Ignoring credit score: Credit score is a number based on credit reports, which is a summary of past and current borrowings and repayment history. Your credit score gets hurt when your have more credit balance in relation to your credit limit, making it difficult for you to get a new credit card or apply for a loan. So, to remain creditworthy, you should keep an eye on the credit score and use your card wisely by avoiding the bad financial habits.