If handled carelessly, credit cards can adversely impact your financial health for a long time to time. These five common signs indicate you are using your credit card the wrong way.
While credit cards bring multiple benefits for their users, they can cause significant risks for those lacking financial discipline. If handled carelessly, they can adversely impact your financial health for a long time to time.
These 5 common signs indicate you are using your credit card the wrong way:
1. Constantly repaying the minimum amount due only
Many credit cardholders make a wrong assumption that repaying only the minimum amount due would save them from paying heavy finance charges. Repaying the minimum amount due would only save you from incurring late payment charges and taking a hit on your credit score. You will still incur hefty finance charges of 23%-52% p.a. on the unpaid component of your credit card bill. Moreover, non-repayment of credit card dues leads to the withdrawal of the interest-free period on fresh card transactions until the entire unpaid component is paid off.
In case you are unable to repay the entire credit card dues, convert the unpayable component into EMIs. The interest rate of EMI conversions are much lower than finance charges levied on unpaid dues. This option offer repayment tenures of 3 months to 5 years, allowing card holders to repay unpayable credit card bill at much lower interest rate in smaller tranches as per their repayment capacity. Moreover, opting for this route even reinstates the benefit of interest-free period on credit cards.
2. Cash withdrawal using credit cards through ATMs
Cash withdrawals using credit cards attract cash withdrawal fees of up to 3.5% of the withdrawal amount. Additionally, card issuers also levy finance charges of up to 52% p.a. right from the withdrawal day until their repayment. Hence, try to avoid making cash withdrawals through credit cards to the extent possible. In case it becomes totally unavoidable, make sure you repay the entire withdrawn amount as early as possible. Doing so would reduce additional interest cost incurred in the form of finance charges.
3. Constantly keeping credit utilization ratio (CUR) of over 30%
CUR is the percentage of total credit limit used by you. As lenders usually consider those with a CUR of over 30% to be credit hungry in nature, credit bureaus may also reduce the credit score of those surpassing the 30% level of credit card. Thus, restrict your overall credit card within 30% of your total credit card limit.
In case you breach this limit frequently, either request your existing credit card issuer to enhance your credit limit or apply for an additional credit card. Opting for either of these options would help you reduce your CUR, provided you do not increase your credit card spends disproportionately after obtaining a higher credit limit.
4. Ignoring reward point expiration date
Depending on the reward point program offered on the credit card, cardholders can use accumulated reward points for buying gift vouchers, converting them into air miles, purchasing goods at select merchant outlets or online partners, or by adjusting them against the outstanding card bills. However, accumulated reward points of most credit cards expire within 2 to 3 years of their credit. Very few credit card issuers offer cards with no reward point expiry. Hence, you must always keep a close watch on the validity of reward points, as well as the terms and conditions linked with their redemption.
5. Turning down credit limit enhancement offer
Many credit cardholders often avoid increasing their credit card limit owing to the fear of overspending and the possibility of landing into a debt trap. However, note that if judiciously used, this can help you improve your financial health. Hence, you must take such credit limit enhancement offers into consideration whenever it is offered to you by the card issuer.
Doing so would enhance your financial capacity to face financial emergencies or make higher spends during festivals or any important occasion. Also, remember that an enhanced credit limit can reduce your CUR, which can help improve your credit score and thereby, your future loan and credit card eligibility.
(The author is Senior Director, Paisabazaar.com)