Credit cards work on the principle of buy now and pay later. Apart from providing instant credit access, they also come with a host of other benefits such as reward points, discounts and cashbacks on your transactions. The key to reaping optimal benefits is to make regular and disciplined usage of credit cards. While you step into the New Year, make sure to avoid these common credit card mistakes:
1. Using credit card for cash withdrawal
Withdrawing cash through credit card attracts cash advance fee of up to 3.5% of the withdrawn amount and finance charges right from the day of such withdrawal till the date of its repayment. As the finance charges on credit cards can go as high as 49.36% p.a. depending on your card, withdrawing cash from your credit card is capable of burning a hole in your pocket, especially whe the repayment is not made for prolonged period. Hence, make sure you repay the entire cash withdrawal amount as soon as you can if withdrawal is totally unavoidable.
2. Repeatedly repaying the minimum amount due
Credit cardholders unable to repay their full bill amount on time often tend to repay just the minimum due amount. There is widespread myth that paying just the minimum amount due does not attract finance charges. On the contrary, paying minimum due amount would only save you from incurring late payment fee. The rest of the outstanding credit card bill amount would still accrue interest in the form of finance charges. Continual repayment of just the minimum amount due may well land you in a debt trap given that outstanding dues would keep piling up, along with hefty finance charges.
Try to repay credit card bills in full and on time. In case you face difficulties in doing so, either consider converting the entire outstanding balance into EMIs or get your big-ticket spends converted into EMIs. You can also try transferring outstanding balance to another credit card at lower/nil interest rates or avail personal loan for exercising debt consolidation at lower interest rates.
3. Maintaining credit utilization ratio over 30%
As lenders and credit card issuers consider credit utilization ratios of over 30% as a sign of credit hungriness, credit bureaus reduce your credit score by a few points on breaching this level. Hence, make sure to contain your credit card spends within 30% of your total credit limit. If you tend to frequently breach this mark, either request your credit card issuer to increase your credit limit or get an additional credit card to increase your total credit limit. This will bring down your credit utilisation ratio.
4. Failing to plan card spends according to the interest-free credit period
Interest free period refers to the period between the date of a credit card transaction and the due date of its payment. It can range anywhere from 20 to 52 days, depending on the date of your credit card transaction and your card issuer. During this period, credit card transactions do not attract interest cost as long as they are repaid on or before the due date. In other words, your card issuer will finance your card spends for free during this period. Try to plan your card spends, especially the big-ticket ones, in such a way that avails you maximum interest-free period for each of them.
5. Not redeeming reward points before expiry
Most credit card issuers set expiry date for the reward points by their cardholders. This period usually range between 2-3 years after which they cannot be redeemed. Hence, keep a tab on the expiry date of your reward points’ benefits by going through terms and conditions of the your card’s reward points program at regular intervals. Also remember that many card issuers mention the number of reward points nearing expiry in their bill statements.
(The author is CEO & Co-founder, Paisabazaar.com)