Have you ever received calls about credit card needs? The representatives even offer attractive discounts. The whole cashless concept sounds easy and convenient. You don’t need to carry multiple bundles of cash. Yet, you have access to funds all the time.
There is no stress of thefts or robberies also. A credit card indeed has many benefits. So much so that credit card usage jumped 48% in March 2022. However, you also must understand the disadvantages of a credit card.
Missing the bill payment date will result in a penalty. It will also lower your credit score. Hence, you need to be careful while using it. Sometimes you may not even realize you are using it wrong. However, it may land you in trouble. This article will help you to avoid these situations.
Incorrect Credit Card Usage
Credit cards have a lot of uses. But, these pros may turn into cons if you are not careful. Here are some examples of credit card usage which are not good for you.
- You only pay the minimum due amount.
Your credit card statement shows your credit card usage, total bill and minimum due amount. You must pay the minimum due amount to avoid late charges. The minimum amount is usually 5% of your total amount. You can pay this amount rather than the total bill. But, the problem occurs when you only pay for that amount every month. This way, your debt will never end. You will keep paying it off for years. Also, the balance non-repayment amount will attract interest.
- You have a high credit utilisation ratio.
When you apply for a credit card, you get a credit limit on the card. It depends on your income and repayment capacity. A credit limit determines how much total credit you have and can use. The credit utilisation ratio shows how much credit you’ve utilised. It reflects your credit card usage. A low credit use ratio shows lenders that you are not hungry for credit. Usually, lenders prefer the credit use limit to be less than 30%. A low percentage also reflects better on your credit score. A credit score represents a borrower’s worthiness. It is a primary factor lenders check before approving a loan.
- You don’t check your billing statements.
You may not be using a credit card regularly. Hence, you may neglect to check your credit bill statements. It is a warning sign. Offline and online credit card errors and frauds are common. But, if you never check the bills, you will never know. Your actual credit card usage may be much low than it shows. It may also hamper your credit score. A monthly review can help you take timely action for such errors.
- You withdraw cash with a credit card.
As per credit card terms and conditions, there is a cash withdrawal limit. In some cards, you can’t withdraw cash for a minimum of 180 days. Failing to do so attracts a cash advance fee and finance charges. The finance charges can go as high as 50%. Withdrawal fees can be as high as 3.5%. Hence, it is not a good option for your financial health. It is a sign to keep your expenses in check. You may be spending more than you should.
- You forget to check the expiry date of reward points.
When you opt for a credit card, the banks offer you attractive offers like discounts, reward points and cashback. You may also get some free miles or access to airport lounges. All this helps the banks to secure their customer’s loyalty. It is a common habit to accumulate points. What you forget is that these reward points come with an expiry date. Usually, it is two years. If you don’t redeem it within that time, they are lost. The reward points don’t carry forward. You can always contact the card issuer if you have doubts about the expiry date.
- You are using one credit card to pay off another card
A credit card helps us to pay off our bills and expenses. But, it is a debt that you need to pay. Taking on another card to pay off first card bills is a big no-no. You are only collecting debts and hampering your financial health. Even maxing out your current card is not good. Also, too many debts reflect badly on your credit score. Even enquiring about cards can lower the score.
- Your credit card purchase is not approved
Sometimes, we may enter the wrong PIN or have bad connectivity. It may lead to a decline in transactions. These situations are normal. But, if the transaction is rejected due to lack of funds or bill non-payment. Then it is a warning sign. You must then cut back on your spending. Also, analyse your monthly budget.
- You are unaware of credit card charges
When companies issue you credit cards, they only focus on the good points. Not the fees they charge. Also, most of us forget to read the terms and conditions. Here is where you can land in trouble. Companies charge you annual fees for owning a credit card. You also must know the interest charges, foreign transaction fees, cash advance fees and over-the-limit charges. A small fee will not hurt. But, if these accumulate, it will be a problem.
Some Suggestions to Avoid Incorrect Credit Card Usage
Now, you are aware of incorrect card usage examples. Let us give you some tips on how to avoid these situations.
- Plan your monthly finances
- Read the credit card terms and conditions
- Don’t apply for multiple cards
- Know your credit card limits.
- Avoid cash advances on your credit cards
- Check your card statements periodically
- Try to pay off the whole credit card amount
- Practice saving and be disciplined in your finances
In a Nutshell
After reading the above points, you understand how to use your credit cards properly. Credit card usage can increase or lower your credit score. Even if you may not need a loan, a low score will hamper your borrower chances in future. Hence, you need to maintain a minimum CIBIL score.