Credit cards can be of great help in accessing instant credit and adjusting short-term liquidity mismatches, especially during uncertain times. However, there are some credit card mistakes that one must avoid under the current circumstances.
Credit cards can be of great help in accessing instant credit and adjusting short-term liquidity mismatches, especially during uncertain times like the present one. However, lack of awareness of their features can land one in a debt trap, harm credit score and deprive one of some crucial credit card benefits as well.
Here are some credit card mistakes that one must avoid under the current circumstances:
1. Availing the moratorium on credit card dues
Credit cardholders facing difficulty in repaying their credit card bills can try to avail the moratorium on credit card dues. However, doing so would only save them from incurring any late payment fee and adverse reporting to the credit bureaus. Those not paying their outstanding credit card bills will continue to accrue hefty finance charges, which may range anywhere around 23-49% p.a. As a result, availing the moratorium may land them in a debt trap as the outstanding credit card dues would keep on piling up along with hefty finance charges.
What to do: Always try to repay your credit card bills in full and by the due date. In case you are facing difficulty in repaying the full amount on time, consider options such as availing a personal loan, if available, to pay off the credit card debt or converting the entire outstanding balance or big-ticket spends into EMIs. The tenure of these options can range anywhere from 1-5 years, enabling repayment in smaller tranches in the form of EMIs. The interest rates levied on these alternative options are much lower than the finance charges charged on your unpaid card dues.
2. Maintaining credit utilization ratio over 30%
This ratio refers to the proportion of total credit card limit utilized by you. Given that lenders generally consider a credit utilization ratio of over 30% as a sign of being credit hungry, credit bureaus too drop your credit score by a few points on breaching this mark. Therefore, to work towards building and maintaining a high credit score, make sure you contain your overall credit card spends within 30% of your total credit limit.
What to do: In case you tend to frequently breach 30% mark of your credit utilization ratio, consider either requesting your lender to increase your credit limit or go for an additional credit card. Doing so would bring down your credit utilization ratio within 30%, provided you do not spike up your credit card spends upon getting a higher credit limit.
3. Withdrawing cash through credit card
Cash withdrawals via credit card attract twin charges in the form of cash advance fee, as high as 3.5% of the withdrawn amount, and finance charges right from the day of such withdrawal till the date of repayment. These two charges together can burn a deep hole in your pocket, especially if done frequently.
What to do: Cash withdrawal through credit card should always be your last resort. In case it becomes totally unavoidable, make sure you repay the entire amount as soon as you can to minimize the impact of the associated charges.
4. Letting your reward points expire
Credit card issuers highlight their reward points as an USP to their card holders. Some cards allow these reward points to be adjusted against the outstanding bill of the card while others allow them for availing pre-specified services and products, like airline tickets, fuel, consumer goods, gift vouchers, etc. However, reward points of most credit cards come with a pre-determined expiry period of usually 2-3 years. Many credit card holders fail to keep a track of these expiry dates and thereby, lose their accumulated reward points.
What to do: Always keep a close track on the terms and conditions related to your credit card’s reward point program. Ensure to redeem your reward points before their expiry.
5. Not planning spends according to interest-free credit period
Interest-free period refers to the duration between the date of your credit card transaction and the due date of its payment, which usually ranges anywhere between 20 and 52 days. Credit card transactions made during this period do not attract interest cost in the form of finance charges as long as they are repaid by the due date. Simply put, the card issuer finances your card spends for free during this interest-free period. This feature can be extremely helpful in times like this when many are facing short-term liquidity mismatches.
What to do: Try to plan your credit card spends, especially the big-ticket ones, to maximize the benefit from interest-free period. Those having multiple credit cards can distribute their credit card spends across their cards to avail the maximum interest-free period.
(By Sahil Arora, Director & Group Head, Investments, Paisabazaar.com)