FINANCE SPECIAL ....The seven credit card sins to avoid

FINANCE SPECIAL The seven credit card sins to avoid

Credit cards offer convenience and safety, but using plastic recklessly can lead to trouble, says Raj Khosla

Credit card usage in India has increased exponentially in the past couple of years. According to RBI, there were over 4.1 crore active credit card accounts in India in August 2018, compared to just over 2.7 crore cards in October 2016. These numbers highlight a remarkable shift in preferences. However, new credit card users are prone to making mistakes when using plastic. Here are the seven sins that credit card users should avoid at all cost.

SIN #1

Compromising card details

The biggest sin is to reveal your credit card details to anyone claiming to be a representative of the card company. Banks and credit card companies will never ask you for details. Anybody who does so is a scamster out to rob you. Also, be careful when handing over your card at a merchant outlet, especially at petrol pumps or makeshift establishments. There are high chances of your credit card getting skimmed, leading to misuse and losses. Basic precautions can save you millions, literally.

PATH TO REDEMPTION

Never divulge credit card PINs and other details to a telecaller or anyone else. Don’t give your card if the EDC machine is not in view. Check amount before you key in the PIN.

SIN #2

Failing to pay on time

Credit card companies don’t like customers who miss payments. They send reminders by mail and SMS, telling you when payment is due. Don’t ignore these alerts. Missing a payment attracts penalty as well as interest on outstandings. What’s more, purchases made in the following month do not get interest-free credit. The biggest loss is a blemished credit history and lower credit score, which adversely impacts your chances of availing any credit facility in the future.

PATH TO REDEMPTION

Instruct your bank to pay the card bill by a certain date every month. If you are strapped for money, at least pay the minimum charges so that there is no penalty.

SIN #3

Paying only minimum due

Credit card companies want you to revolve the credit so they can earn a fat interest. If you pay only the minimum due, you are charged 2-4% interest on the unpaid amount. This works out to 24-48% annually and is the most expensive form of debt. When you have an outstanding balance on your card, the interest-free period on purchases does not apply. Any additional spends accrue interest from day one and you end up paying hefty interest costs.

PATH TO REDEMPTION

Control expenses and spend only as much as you can comfortably repay in full at the end of the month. If you can’t, opt for payment in EMIs where the interest charged is lower at 15-18%.

SIN #4

Withdrawing cash

Credit cards allow users to withdraw cash from ATMs—at a very high cost. There is a fixed charge for any cash advance. This can be as high as 2.5% of the amount withdrawn. Withdrawals attract a high interest of 2-4% a month. Unlike purchases at merchant establishments, the interest rate meter on cash withdrawals starts from the first day. During international travel, foreign exchange cash withdrawals could attract an additional transaction fee.

PATH TO REDEMPTION

This is a costly option so it is best to avoid cash withdrawals, except in an emergency. Also, don’t make too many small withdrawals. That can lead to high fixed charges.

SIN #5

Utilising full limit

A credit card gives the user the freedom to spend. Goods and services that once appeared beyond one’s reach becomes available with the swipe of a card. However, if you use up a large portion of the available credit limit, your credit score gets hit. High credit usage portrays the user as credit hungry with a potentially higher chance of default. This adversely affects your credit score and may make it difficult for you to access additional credit facilities.

PATH TO REDEMPTION

Control expenses by sticking to a budget. Instead of just one card, keep 2-3 credit cards so that you don’t exhaust the limit.

SIN #6

Spending to earn rewards

Card companies encourage you to spend more by offering reward points on every expenditure. While it sounds enticing, don’t spend only to earn points. Also, don’t wait too long to accumulate points. The reward points lose value over time like money. If 10,000 points can fetch an item today, two years later the same item may need 13,000 points.

PATH TO REDEMPTION

Spend only when you must and as per your budget. Encash your reward points every 1-2 years. If the credit card company allows, adjust the points against your bill payments.

SIN #7

Closing cards randomly

People sometimes shut their card accounts. However, this is not advisable. For example, if you have two cards with a credit limit of ₹50,000 each and you spend ₹30,000 a month, your credit utilisation ratio is 30%. If you close one card, your credit utilisation ratio jumps to 60%. A higher credit utilisation ratio hurts your credit score, thus making it difficult to avail loans in future.

PATH TO REDEMPTION

Keep cards active even if you don’t use them. Revolve usage over 2-3 cards to maximise the credit-free period extended to each of them.

ETW 25FEB19