It really feels excellent receiving a credit card just after landing your first job. Turning a massive fan of these plastic cards is easy. But failing to identify common credit card mistakes make people turn them into financial liabilities.
Credit cards are amazing financial tools that offer some significant benefits for those who know how to use them to their advantage. Why not, to some it is a great medium to feel rich. For others, it can be a means of instance money generation at the time of emergency. But at the end, it is an exchange of money which needs to be paid later.
If you have the discipline to pay off your balance each month and take care of all the don’t, using a credit card makes excellent financial sense.
Generally, those who assume these cards as a money printing machine, sooner or later are bound to fall into such an outstanding credit card debt.
Value and use of Credit Cards Currently
All of us use virtual currencies in one way or another even if we don’t realize. We just see the bunch of numbers in our bank account and transfer some of them to someone else’s account when we do any transaction. Just exchange numbers and the transaction is done. Well, one of the most prominent modern ways to operate this way is by using plastic cards! While the history of credit is too old, this plastic cards era started around 1950. Initially introduced as “buy now and pay later” tokens, attractive reward programs and cashback offer began to kick in about 1980’s.
Credit usage has changed at a significant level within these last 40 years or so. From a “Buy now, pay later” tokens, they now not only offer VIP access to particular services but also determine your credibility.
Shining Credit Card Mistakes
Every financial product come with its advantages and disadvantages. As an individual, the important debt traps that you should be aware of are:
- Paying Bills Late
- Making Minimum Due Payments
- Taking Cash Advantages
- Ignoring Monthly Statements Check
- Spending to Earn Rewards
- Bungling Balance Transfers
- High Credit utilization ratio
- Paying Excessive Annual Fees
- Neglecting Credit Score
So now, let us dive into what they are and how they affect you
1. Paying Bills Late:
“Late payments are the biggest foul when it comes to credit cards“ warns Ben Woolsey, director of marketing and consumer research at CreditCards.com. The consequences can include late fees, loss of grace period for future purchases, sometimes increase in monthly interest rates, and a lower credit score. Late payments, especially those more than 30 days overdue, can hurt your credit score. Payment history accounts for 35% of a credit score (also known as Cibil score in India). A single 30-days-late payment can drop your score by 60 to 110 points, according to CreditCards.com.
The lesson: Pay your bills on time, every time. The CARD Act requires banks to mail your statement at least 21 days before the due date. Mark your calendar, and allow enough time for postal delivery. Or better yet, pay bills online.
2. Making Minimum Due Payments:
Paying minimum amount(MAD) instead of entire bill due seems lucrative to most of us as it keeps your card active and card account operative. Afterall, what difference would a month or too make. It also ensures no penalty or late payment charges will be charged by bank nor will it affect your credit score. But is it wise? Absolutely NO! By paying only MAD, not just you end your interest-free grace period but allows banks to demand interest on new spends from the date of purchase. The interest rate is applied to the amount from the very first day and will apply till paid in full.
Suppose you make purchases and your statement is generated of Rs 10,000 on Nov 18. Suppose you pay only the MAD(say Rs250) by due date Dec 5 and make 2 separate purchases on Rs 10,000 each on Dec 1 and Dec 10. Now statement generated on Dec 18 will have following interest additions because you paid MAD last month:
- Interest on the outstanding balance of Rs 9750 from Nov 18 to Dec 18
- [(9750*2.65*12*30)/365]/100 = 254.83
- Interest on Rs 10000 spend from its purchase date Dec 1 (i.e. 19 days)
- [(10000*2.65*12*19)/365]/100 = 165.53
- Interest on Rs 10000 spend from its purchase date Dec 10 (i.e. 9 days)
- [(10000*2.65*12*9)/365]/100 = 78.41
So just by paying a one-time Minimum due amount, you took upon to pay Rs 498.77 as interest (plus if there is service tax and other changes applicable) even if you are ready to pay entire bill on next billing date.
3. Taking Cash Advantages:
Cash withdraw from credit card do not enjoy any grace period or free credit period and ensure interest changes from same day until paid. This may include an additional transaction fee upfront like Rs 500/700 or 2.5% of the takeout amount. These are varying from bank to bank but apply to almost every credit card issued in India. So, if you choose to withdraw cash using your credit card from ATM, the interest is applied to the entire amount from the very first day and will be calculated till the amount is repaid in full irrespective of the billing cycle. So, unless it is an absolute emergency, do not use your credit card to get cash from ATM.
4. Ignoring Monthly Statements Check:
We tend to live in an automated environment where we allow banks to auto-deduct min/whole credit card amount from savings account so that you don’t have the hassle with missing dates. As soon as you receive your monthly credit card statement, you should take a few minutes to look it over. Mistakes can happen and so can thefts, So do check for any unfamiliar charges. The sudden appearance of unknown charges can also signal identity theft. Better call your lender immediately to report discrepancies.
Also keeping an eye on the bill makes you look at unnecessary purchased you made and manage your spendings.
5. Spending to Earn Rewards:
Usually, credit card lender offers “free” rewards all the times, like high cash back or discounted airline tickets. But free is not always free. While money spent is always too high in comparison to rewards in return. You need to pay very very close attention towards these offers. Since return rewards will never beat credit card interest, you need to make sure that you are not going for small cash backs at the cost of high interests.
6. Bungling Balance Transfers:
Individual credit card companies allow you to move your existing credit debts from one high-interest-rate card to another with low introductory rate, and so would make sense as well. But if one ignores to read balance-transfer rules and only look at interest rates, simply he/she is to be blamed. While doing so transfers, you always need to check how long introductory offer lasts and what will be updated rate of interest. Would one be able to repay before this period ends? Are there any upfront transfer fee. Otherwise eventually, you may end up paying more for the long run.
7. High Credit utilization ratio
Your credit utilization ratio is the percentage of your credit limit (for a particular card) that you use for credit you. If high, it can impacts your Cibil score negatively and creates issues on a long run. In general, it should be kept around 30%.
8. Paying Excessive Annual Fees:
Some credit cards that provide higher cash-backs have some amount as annual fees to be paid. Unless you have regular high spending, try to avoid yearly credit card. Banks typically charge these fees for one of three reasons:
- A credit card offers a rewards program such as cash back or free travel;
- A card grants access to premium services such as advance ticket purchases.
- Or a cardholder is deemed a risky borrower due to a low credit score or limited credit history.
To counter high annual fee, you need to make sure to select the correct type of credit card which can provide you high reward points without running for them and you are able to recover that fee with much less spending as possible. If you are charged a fee due to low credit score, you can start with a lower annual fee card and build your credit score by paying the full amount each month (no MOD). After a couple of months, once your credit score builds up, you can recheck with the bank to remove annual fee.
9. Neglecting Credit Score
Your Credit Score or Cibil score is more or less a grade of how you manage your credit. From Late Payments to Cash advances, anything that looks most attractive about credit cards inversely affects your credit score. Your repayment history counts for 30-35% of your Cibil and thus one single mistake counts too much. As you know all banks visit your cibil score before providing you with any loan, a dent in your score can affect you for a long term. This is far more hazardous than paying interest or fee.
These are few regular mistakes that one must be aware of before starting with your credit cards. There are more, but if you take care not to fall for these at least, one should be good at enjoying credit cards at no cost.