Borrowings: Four credit card risks to guard against

Disciplined use of your cards and making payments on time will not only keep these risks at bay but also help you make the best use of your credit cards.

Borrowings: Four credit card risks to guard against
Credit cards are one of the costliest forms of borrowing as they charge the highest interest rate, usually ranging from 22% p.a. to 49% p.a.

Credit cards are a type of short-term loan where you do not have to pay any interest if you clear all your dues on time. However, like any other type of borrowing, they carry certain risks if you are irresponsible in using them. Disciplined use of your cards and making payments on time will not only keep these risks at bay but also help you make the best use of your credit cards.

Here are the major risks associated with credit card usage and how to avoid them.

Risk 1: High interest charges

Credit cards are one of the costliest forms of borrowing as they charge the highest interest rate, usually ranging from 22% p.a. to 49% p.a. However, the interest is applicable only in case of non-payment of the dues in full and on cash withdrawal. When you do not pay the total amount due, new transactions also start attracting interest charges from the first day, which means the interest-free period becomes ineligible.

While some may have to bear the interest costs due to financial constraints, many cardholders still have the misconception that it is enough to pay the ‘minimum amount due’. Paying the minimum due only saves you from the late payment penalties. However, the interest costs on the unpaid balance and new transactions could be far more than what you save on the late payment charges.

How to avoid it?

It is always advised to pay the total amount due on your card on or before the due date. “If you cannot afford to make the full payment, try to convert the dues into EMIs and pay them off in smaller installments over a few months. If that is not possible, you can also take a personal loan or avail the balance transfer facility; all these methods would be economical in comparison to finance charges applicable. Also, avoid cash advances as they incur interest charges from the first day,” says Sachin Vasudeva, Director & Head of Credit Cards Business, Paisabazaar.

Risk 2: Overspending

Credit cards give you additional purchasing power, which can easily lead to overspending, especially for someone who tends to splurge. Cards give you reward points, cashback, and discount with popular brands, which can encourage people to make unnecessary purchases. This can result in spending more than you can afford to repay.

How to avoid it?

The only way to avoid overspending is to practice strict financial discipline. Check all your credit card statements regularly, see where you are spending the most and what can be avoided. Also, keep track of the billing cycles on each of your cards to make the most of the interest-free period. If you find it hard to avoid splurges, try to keep your credit cards at home when going out and use other payment methods like UPI, mobile wallet, or cash to avoid splurging

Risk 3: Negative impact on credit score

Your credit card payment records are also shared with the credit bureaus. Late payment or missed payments and defaults on any of your credit cards will lead to lowered credit score.

Secondly, maxing out your credit cards means that you are over-reliant on credit and, as a result, credit bureaus may lower your credit score if you regularly max out your cards.

How to avoid it?

If used wisely, credit cards will only improve your credit score. The best way to do this is to always pay your bills in full by the due date. If you frequently miss the due date, it may be better to set standing instructions for payment or set due date reminders for each of your cards.

Moreover, you should avoid maxing out your credit cards. “If you find it hard to keep the utilization ratio low, it may be time to get another credit card or ask for a limit increase on your existing card. Do not apply for multiple credit cards at the same time as it can also lead to a reduced credit score. Instead, see what you are eligible for, check if it matches your requirements and apply accordingly,” suggests Vasudeva.

Risk 4: Fraudulent transactions

Fraudsters may get hold of your credit card details through fraudulent emails or phone calls and make transactions through the card. They may also commit fraud by duplicating your card (skimming) at POS terminals. Some may also resort to identity theft and avail a card in your name and PAN.

How to avoid it?

You can avoid credit card fraud by staying vigilant and using your card securely. Never share sensitive card details with others. When making a purchase at a POS terminal, make sure the card is swiped in front of you; do not hand it over to someone else. Check your credit card statements and credit reports at regular intervals to detect fraudulent transactions or identity thefts. If you find any such discrepancies in your reports, inform your card issuer/bureau immediately.

In addition to these, you should always choose a credit card that matches your lifestyle as it would allow you to get the best value-back on frequent purchases. Make sure you get maximum benefits at the lowest cost, instead of availing a card solely based on joining bonus or pre-approved offer.

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