Credit cards are an excellent method for borrowing money in order to make purchases and earn rewards for doing so. That too, without any interest!
This seems fantastic until you start falling behind on payments and realise you can't keep up with them. Thereafter, you'll be subjected to astronomical fees and interest rates of 40-50%.
To help you avoid the pitfalls of credit card debt, we’ve compiled a list of 5 credit card mistakes you shouldn’t make:
1. Making Minimum Payments 🤹♀️
Paying just the minimum amount due is a recipe for disaster, that many succumb to. If you only make the minimum payment on your credit card each month, you’ll end up paying a lot in interest and it will take you much longer to pay off your debt.
For example, if you have a Rs. 1 lakh balance on your credit card with a 42% Annual Percentage Rate (Interest rate the credit card provider charges) and you make a minimum payment of Rs. 5,000 each month, it will take you nearly 35 months to pay off your debt and you will end up paying about Rs. 75,000 in interest!
Balance | APR | Minimum Payment | Time to Pay Off | Interest Paid |
|---|---|---|---|---|
Rs. 1 lakh | 42% | Rs. 5,000 | 35 months | Rs. 75,000 |
Rs. 1 lakh | 42% | Rs. 7,500 | 19 months | Rs. 37,000 |
Rs. 1 lakh | 42% | Rs. 10,000 | 13 months | Rs. 25,300 |
Rs. 1 lakh | 42% | Rs. 25,000 | 5 months | Rs. 9,700 |
Rs. 1 lakh | 42% | Rs. 50,000 | 3 months | Rs. 5,600 |
To avoid paying a ton in interest and prolonging the life of your debt, make sure to pay more than the minimum payment each month. If possible, try to pay off your entire balance so you can avoid paying interest altogether.
In the event that you find yourself spending more than you can afford to repay in a single month, you can use a credit card and convert your purchases into EMIs and repay the bills at your convenience.
Though it's not recommended, this is a handy feature to have in the event of emergencies or other unforeseen expenses.
2. Making Late Payments 🕔
Missing payments can happen for a variety of reasons, such as forgetting or being unable to make the payment. If you make a late payment on your credit card, you’ll be charged a late fee. Late payments can also damage your credit score. So be sure to pay your credit card bill on time, every time.
When using a third-party service like CRED, Paytm, Mobikwik, or even Billdesk to pay with a credit card, it's best to pay at least three days in advance to ensure timely settlement.
If you’re having trouble making a payment, call your credit card company and explain the situation; they may be able to work something out. If you tend to forget to pay bills on time each month, a convenient hack is to set up automatic payments, or "AutoPay," from your bank account.
3. Going Over Your Credit Limit 🌊
If you spend more than your credit limit, you’ll be charged an over-limit fee. Plus, going over your limit can damage your credit score. So it’s best to stay under your credit limit.
Just because you have the available credit doesn’t mean you should use it. A good rule of thumb is to keep your total credit utilization ratio (spending as a percentage of the total credit limit) below 30%.
To put it another way, if you have a total credit card limit of Rs. 1 lakh, you shouldn't have more than Rs. 30,000 in outstanding balances at any given time.
Also, it can be tempting to keep spending if you have a high credit limit. If you max out your card, you may be tempted to use other forms of credit, such as a personal loan, to make ends meet.
Avoid making impulse purchases with your credit card. If you see something you want, take a moment to think about it before you buy it. Ask yourself if you really need it or if you can wait to purchase it. If you can wait, put the item on your wish list and save up for it.
4. Making Cash Advances 💷
A credit card cash advance is a technique to get cash right away by using your credit card to make a withdrawal. You can get a cash advance through an ATM, bank branch, or internet banking platform. But keep in mind that cash advances cost a lot of money.
When you use your credit card to withdraw cash, you’ll typically be charged a fee of around 2.5%. This means that if you withdraw Rs. 10,000 in cash from an ATM, you’ll actually end up paying an additional Rs. 250, just to be able to do so. Additionally, a cash advance will accrue interest at a higher rate than regular purchases and usually without an interest-free period.
To avoid being charged fees and accruing high-interest debt, use a different method to withdraw cash when needed, such as your debit card or a check from your bank account.
5. Not Shopping Around for the Best Credit Card
There are a lot of different credit cards out there and it’s important to find one that best suits your needs.
Consider factors such as the interest rate, annual fee, and rewards program before you decide on a credit card. You can use a credit card comparison site to help you find the best credit card for you.
To avoid being surprised by hidden fees or high-interest rates down the road, make sure to read the fine print before signing up for any credit card.
In Sum ➕
With responsible use, credit cards can be a useful tool, providing access to a line of credit and 45 days of interest-free financing. Stop criticising and hating credit cards and learn to use them to your advantage. They can be powerful tools for improving one's financial management if used correctly.
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