Misusing credit cards may hurt your credit score rather than building it up. Therefore, it’s crucial to develop good financial habits to stay out of debt and avoid certain mistakes people often make while using credit cards.
Credit cards are one of the best ways to build credit history while making purchases. But the catch is, if you’re not careful, the small metal card may do more harm than good. While going for any loan, renting an apartment or applying for a new job, you may need a review of your credit score. While credit cards might be convenient, it’s important to keep track of your spending.
Gaurav Jalan, CEO and Founder, mPokket, says, “Misusing credit cards may hurt your credit score rather than building it up. Therefore, it’s crucial to develop good financial habits to stay out of debt and avoid certain mistakes people often make while using credit cards.”
Credit cards and their effect in the long run
While making minimum payments each month may seem like a simple approach to pay off debt, what most don’t realise is that it ends up costing one much money in the long run. Experts point out, making only the bare minimum monthly payment prolongs the time required to pay off debt. Smaller payments will scarcely make a difference on the principal sum and the interest will keep inflating the borrower’s overall debt, increasing its overall cost.
Instead, according to Jalan, ensure you pay off your debt before the due date to avoid paying interest. Don’t make it a habit to carry on the balance from month to month by just paying off the minimum amount due. Credit card interest rates are much higher compared to personal loans.
Credit card vs personal loan
Industry experts say, for immediate or urgent expenses when you lack sufficient liquidity, it’s better to take a personal loan instead of spending that amount with your credit card.
Furthermore, Jalan adds, “while applying for loans from traditional lenders, the most crucial component of the credit score is one’s payment history. Lenders check this to ascertain whether the borrower is a reliable borrower or not.” Additionally, note that missed or late payments can hurt your credit score, resulting in higher late fees and interest.
Similarly, it is essential you keep your credit utilization ratio within a certain limit. Every time you breach the limit, your credit score drops a couple of points. Consequently, industry experts say one must limit expenses within this limit. In case, you often breach this mark, either request the credit card issuer to increase your limit or apply for a new card from another entity.
Having said that if you are one of those people who use their credit card for daily expenses, ensure you make a budget at the beginning of each month, taking into account all your grocery needs and utility bills. That way you will be able to adhere to the budget every month.
Another major mistake people make is withdrawing cash on their credit cards. Note that, depending on the amount that one withdraws, most banks can charge upto 50 per cent of the amount as an advance withdrawal fee. This amount is charged from the day the cash is withdrawn till the borrower repays the entire amount. Hence, it is always advisable to avoid withdrawing cash on the credit card unless one has exhausted all other options.
In essence, points out Jalan, “that there is nothing wrong with using credit cards as long as are being attentive borrowers. Developing healthy financial habits via the thoughtful use of credit cards will not only help one build a healthy credit score but also leverage certain advantages that come with credit cards such as the reward points on one’s spending, cashback and even no-cost EMIs on major purchases.”