Credit cards allows you buy things now and pay for them later. They offer benefits like cashback , discounts and rewards. Credit cards not only help improve your credit score but also offer many other benefits. However, some people mismanage them. Often, users make mistakes without realizing how they can affect their finances. Here are some common mistakes to avoid:
1. Not Choosing a Right Credit Card
Many people make the mistake of getting a credit card without understanding its terms and conditions. For instance, if you are not travel frequently, choosing a card focused on travel benefits won't be suitable for you. You won't benefit from the card, and it won't meet your needs.
For example, if you're looking for a cashback card, Axis Ace would be a good choice. If you're an avid online shopper, the Flipkart Axis Credit Card or Amazon Pay ICICI Credit Card would suit you well. Always assess your spending habits before applying for a credit card and choose one that matches your needs best.
2. Only Paying the Minimum Amount Due
Credit card issuers offer the option to make minimum payments for your balance, but it's not wise to rely solely on this. If you only pay the minimum, your finances can suffer just like with missed or late payments. This is because you'll be charged interest on the remaining balance, even if you pay the minimum.
Moreover, any new transactions you make will also start accumulating interest immediately if you have an unpaid balance. So, it's best to pay your credit card bill in full and on time. If you can't pay the entire amount, try to pay off as much as possible.
3. Not Maintaining Credit Utilization Ratio
Using most or all of your available credit limit isn't recommended. It can raise your credit utilization ratio, which might lower your credit score. Experts suggest keeping your utilization ratio at 30% or less. If you can't manage this, aim to keep at least 20% of your total credit limit free. This helps maintain a good credit score and ensures credit availability for emergencies.
If you're close to reaching your credit limit, consider paying with cash for future expenses. If you frequently exceed your limit, ask your card issuer to increase it or get an additional credit card to raise your total credit limit.
4. Taking Cash Advances and Spending on Unnecessary Things
Taking out a cash advance with your credit card is one of the most expensive things you can do. While it might seem convenient to have instant cash, it comes at a high cost. As soon as you withdraw cash, interest starts accruing immediately. Additionally, cash advances incur extra fees. Some banks charge a flat fee, while others charge a percentage of the amount withdrawn. For example, HDFC Regalia charges a cash advance fee of 2.5% of the transaction amount.
It's important to note that with cash advances, the interest-free period doesn't apply. You'll start accruing interest on new purchases from the day of the purchase. This adds significantly to your debt. Plus, you'll have to pay a one-time cash advance fee, usually charged as a percentage of the amount withdrawn or a flat maximum fee, whichever is higher.
5. Missing Payments of Credit Card Bills
Many credit card users think that missing a few payments on a credit card isn't a big deal. However, even one missed or late payment can lead to significant debt. When you miss a payment, interest charges start accumulating on your unpaid balances. It's important to note that credit card interest rates are quite high, ranging from 2% to 3.5% per month or more. Additionally, interest is calculated daily, which means your debt grows rapidly over time. That's why it's crucial to pay your credit card bills in full and on time to avoid accumulating debt.
Credit card providers calculate interest on the due amount using this formula:
(Number of days from the date of purchase till payment is made) multiplied by (Full outstanding amount) multiplied by (Interest rate percentage p.a. divided by 365)
Also read: Best Low-interest Credit Cards in India