Stop Making These 10 Common Credit Card Mistakes Right Now

Whenever we seek someone¡¯s financial advice, one term that almost all of us are made to feel dreadful about, is credit cards. However, in reality, whether credit cards turn into boon or bane in your financial life depends entirely on how disciplined you are towards their usage and repayment.

So, if you are amongst those who turn a blind eye towards credit cards¡¯ benefits and prefer to instead believe the negativity around them, then in all likelihood, you are at fault. Wondering how? Let¡¯s walk you through some of the biggest credit card blunders that harm your financial health in multiple ways.

1. Missing your credit card bill¡¯s payment due date

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Do you fail to pay your credit card bills on time? Is missing the bill due date a common occurrence? If the answers are yes, then its time for you to pull up your socks. As a credit card user, one of most important things you have to keep in mind, is your bill¡¯s due date. As per your billing cycle, a specific due date is assigned to your for each card, on or before which you have to pay your outstanding dues. And in case you fail to do so, late payment fees along with hefty finance charges would be levied by the credit card issuer, which are capable enough to burn a deep hole in your pocket. If you tend to forget the due dates, use the auto debit facility or set reminders. There are numerous apps to help you with that. All you need to do is set up the reminder or auto debit facility, whichever way you like, and then just ensure you act upon it. For auto debit, ensure your linked account is adequately funded to pay the bill, and for reminders, make sure to pay the bill as soon as the reminder alarms you.

2. Repeatedly paying the minimum amount due

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Do you feel the heat every time your credit card bill comes up? And to avoid paying that burgeoning bill, you take the easy way out by repaying the relatively smaller amount in the form of the minimum amount due? If yes, then you need to stop that immediately. Paying the minimum amount due, especially if done repeatedly as a habit, is a sure-shot gateway to debt trap. A lot of credit card users wrongly assume that repaying this minimum due can save them from incurring various fees and charges otherwise levied on failing to pay the dues timely and in full. However, that's where they go wrong. Even though the repayment of the minimum amount due by the due date can save you from incurring late payment charges, the hefty finance charges, which can go as high as 40%-50% p.a. would still be levied on the unpaid dues. And if you fail to even repay the minimum due, you will additionally incur late payment charges, besides getting your credit score hurt. And that's not all. non-payment of credit card dues in full can also lead to revocation of the interest free period on fresh credit card transactions, until the unpaid dues are repaid in full.

3. Withdrawing cash through credit card

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Another blunder that harms your financial health in not one but two ways, is the habit of withdrawing cash from credit cards. Firstly, the cash advance fee is levied on the withdrawn amount, and secondly, the hefty finance charges are levied on the withdrawn cash amount. And the latter is levied right from the day of making withdrawal till complete repayment. While the finance charges are themselves enough to burn a hole in your pocket, having to pay them along with cash withdrawal fee, is no less than an invitation for financial trouble, right?

4. Maintaining a high credit utilisation ratio (CUR)

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This ratio refers to the proportion of your total credit card limit utilised by you. For instance, if your total credit limit is Rs 1.5 lakh and your outstanding credit card dues are Rs 40,000, your CUR turns out to be about 26%. CUR is one of the key parameters factored in by credit bureaus when computing your credit score. Financial institutions and credit bureaus are widely believed to view consumers having this ratio over 30% as credit hungry, hence more prone to defaulting in repayments. That's why credit bureaus too tend to pull down your credit score by some points when you breach this mark. Not only that, having a higher CUR also implies that you are using a lot of your credit limit for making purchases or transactions, which in itself depicts your high reliance on credit, especially in the eyes of lenders and credit bureaus.

5. Avoiding credit limit enhancement

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More often than not, many credit cardholder tend to desist from the idea of enhancing their credit limit. The thought of having an enhanced credit limit grips them with the fear of increased spending and at worst, a subsequent debt trap. However, that's not true. Someone who uses and repays the credit card bills in a disciplined manner, does not need to worry about an enhanced credit limit, which in fact has multiple benefits. Irrespective of whether you are offered the enhancement by the card issuer or you yourself requested for it, having a higher credit limit would allow you more room to manage financial emergencies, in the form of a higher credit limit to use. Moreover, an enhanced credit limit would also pull down your credit utilization ratio (CUR), hence contributing towards gradually increasing your credit score as well.

For instance, if your current credit limit is Rs 75,000 and outstanding dues are Rs 50,000, your current CUR is about 66%. Whereas in case you opt for an enhanced credit limit to, say Rs 1.2 lakh, your CUR drops down to 41%.

6. Bombarding credit card issuers with multiple applications

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Each and every time you apply for a credit card directly with the credit card issuer, the card issuer evaluates your creditworthiness by fetching your credit report from the credit bureaus. Each of such credit report requests raised by card issuers is termed as hard enquiry, which gets listed in your credit report and harms your credit score. So imagine how much damage your credit score would get if multiple such applications, especially within a short period of time, are submitted to credit card issuers. Hence, instead of doing so, try to spread out your applications over a period of time, rather than bombarding them with multiple applications. Its best to do your bit of research regarding the card¡¯s features, fees and your eligibility, and then finalise the lender to submit application.

7. Taking everything on ¡®no cost¡¯ EMI

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Are you amongst those credit card consumers who keep ticking off everything from their bucket list by purchasing it on no cost EMI? If yes, then just stop and read this. and hear us out. The entire aura that has been created around no cost EMIs hides the most important truth about these schemes. Simply put, no cost EMIs are just a marketing gimmick to lure customers, and the interest cost is actually built in and kept hidden from consumers. Check this out to understand this deeper.

Moreover, when facing difficulty in paying your credit card bill, especially during financial hardships when you feel about paying the minimum amount due, remember that the EMI amount is excluded from that 5% minimum due amount that otherwise gets calculated on your outstanding balance including various transactions. So, having EMIs in fact adds to your minimum dues. Read this to understand this further.

Also remember that the cost of GST incurred on the interest component of the ¡®no¡¯ cost EMIs has to be borne by the customer, as it is added to the credit card bill itself, and some card issuers also charge processing fees for this EMI facility.

8. Not planning transactions as per interest free period

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Not many credit card users are aware or are able to maximise this key benefit of credit cards. Interest free period refers to the duration between the date of a credit card transaction and the due date for its repayment as per bill. During this period, no interest is charged on credit card transactions, as long as the entire outstanding due is repaid by due date. Mostly ranging between 18-55 days based on the credit card transaction date and credit card issuer, this feature can be extremely beneficial if utilised well. The earlier you make the transaction during the billing cycle, the more time you have in the form of interest free period, to repay it conveniently by the due date. Whereas the more you delay, i.e the later you make the transaction, especially big ticket ones, lesser the time you get to repay it by the due date.

9. Ignoring the ¡®pre-approved¡¯ loan against credit card when in need of funds

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Just like personal loans, credit card loans are an unsecured form of loans offered to credit card users, without any restriction on end usage. However, the only thing to keep in mind is that credit card loans are pre-approved in nature, implying that credit card issuers offer these loans only to select card holders having good repayment history and credit profile. But for existing credit card users who are in need of urgent funds and are eligible for this pre-approved loan, availing it can be a saviour during a financial crisis, especially when taking any other form of loan becomes difficult.

10. Letting your reward points expire

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One of the prime benefits stated by credit card issuers when pushing their card towards the target audience, is reward points. As and when you keep using your credit card for various transactions, you keep accumulating reward points on eligible spends. And later on, you can redeem these reward points for numerous benefits like conversion into air miles, gift voucher, redemption at select merchant outlets and/or online partners. Sometimes, reward points can even be adjusted against outstanding bills, depending on the reward point program of the that credit card and issuer. However, redemption of these accumulated reward points is only possible when done before expiry, barring a few, almost all credit cards have an expiry put forth for redemption of reward points, which is usually after a period of 2-3 years. Hence, avoid losing out on these points and redemption benefits by keeping a track of the validity of your card¡¯s reward points.

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