The role credit cards play in your life depends entirely on how you use them. If used smartly in a disciplined manner, they can provide a wide range of benefits and even bail you out of financial exigency. On the other hand, sloppy usage can at worse land you into a debt trap along with hefty charges and penalties.
Explained below are some crucial signs that you are using credit cards the wrong way:
Rolling over credit card debt by paying minimum dues
More often than not, credit cardholders who are unable to fully repay their credit card bills on time, find an easy way out by opting to repay just the minimum due amount. However, on the flip side, the rest of the outstanding credit card bill amount continues to accrue interest in the form of finance charges, which may go as high as 47-48 percent per annum.
Moreover, getting habituated in repaying just the minimum amount due can even be a sign of approaching a debt trap, as this practice of rolling over your credit card debt by paying just the minimum due per month would attract hefty charges in the form of high finance charges.
Hence, in case you are indeed facing difficulty in repaying your credit card dues, consider options such as the conversion of the entire outstanding balance amount into EMIs; credit card balance transfer, or get big-ticket spends converted into EMIs. You can also consider liquidating your low-yield investments to repay credit card bills, or leverage your long term investments by taking a loan against securities, as the associated interest cost is much lower than the finance charges levied on a credit card, and your long-term financial goals are also not compromised upon.
Maintaining a credit utilization ratio over 30 percent
This ratio refers to the proportion of total credit card limit utilized by you. As bureaus usually consider a credit utilization ratio of over 30 percent as a sign of credit hungriness, make sure you restrict your spending within this limit. Upon breaching this mark, credit bureaus can pull down your credit score by a few points. If your credit utilization ratio tends to frequently breach this mark, either consider requesting your card issuer to increase your credit limit, or opt for another credit card. Doing so would assist in lowering your credit utilization ratio, provided you don’t hike your spending upon getting access to a higher limit or additional credit card.
Not making the most of interest-free period
Failing to make the most of the interest-free period available on credit cards is another aspect of smart credit card usage which most cardholders tend to miss out on. An interest-free period refers to the period between the date of the credit card transaction and the due date of payment. During this period, the credit card issuer does not charge any interest on your transactions, as long as you can timely repay the entire credit card dues. Usually, this period ranges anywhere between 18 days to 55 days, depending on the date of your transactions.
To make the most of this interest-free period, you should time your major credit card spends at the beginning of your billing cycle, to get more interest-free days to repay them. Whereas in case you have multiple cards with different due dates, consider spreading your transactions amongst them in such a way that the majority of those transactions fall at the beginning of their respective billing cycle.
Withdrawing cash through credit card
Another significant mistake cardholders commit while using credit cards is the withdrawal of cash via them. Not only do such withdrawals attract cash advance fee as high as 2.5-3.5 percent of the withdrawn amount, but they also attract finance charges right from the day of such withdrawal till the date of repayment. Hence, withdrawing cash through a credit card should always be your last resort. And in case this becomes unavoidable, make sure you repay the entire withdrawn amount as soon as possible, to avoid piling up finance charges as well as a cash advance fee.
Letting your accumulated reward points expire
Apart from offers like annual fee waiver, complimentary lounge access at airports and free movie tickets, one of the major benefits that credit card issuers highlight while pushing their products is the availability of rewards. Upon accumulation of reward points, you can redeem them in many ways, such as conversion into air miles or gift vouchers.
However, while using your credit card and accumulating reward points, remember that most credit cards involve a predetermined expiry period for these points, usually between 2-3 years. Once these reward points expire, you cannot redeem them, and hence end up missing out on benefits that could have been availed upon their redemption. Therefore, make sure they go through the terms and conditions of the chosen credit card’s reward point programme, and ensure redemption before expiry.
* This article was published in CNBC TV18 on 26th November 2019