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An increasing number of Indians are savouring the joys of having a credit card and the easy access to credit. There are around 20 million credit card users in India who have helped credit card spends for FY 2015 to reach Rs. 1.9 trillion – a 28% increase from the previous year.
However, while they enjoy the many conveniences of buying on credit, many credit card holders tend to forget , or are simply unaware, of the consequences of using credit carelessly.
Being better informed of some basic credit card dos and don'ts enables you to make optimal use of a credit card and avoid unnecessary damage to your credit health. All you need to keep in mind are some simple common sense tips so you can enjoy all the benefits of a credit card, without inflicting any unwitting damage to your credit health.
1.The cardinal rule for any credit card holder is to pay all bills on time.
It might seem harmless to miss a payment by a few days, but the truth is that a delay of even a single day can potentially affect your credit score, in addition to penal charges. Skipping a payment altogether can have even more serious consequences. Each delayed or skipped payment is reported to the credit bureaus and leads to a decrease in your credit score. While a single late payment may have only a marginal negative effect, multiple delayed payments sends a signal to lenders that you cannot be trusted to fulfill your repayment obligations on time. This will make it difficult for your credit cards or loan applications to be approved in the future.
2.Do not use your credit limit to the full.
Using more than 50% of your credit limit makes lenders concerned about your spending discipline and your ability to spare enough money to make your repayments. Your credit utilisation ratio (or the ratio of your actual spending to your total credit limit) should be less than 50%. For example, if your monthly credit limit is Rs. 1 lakh, make sure your monthly bill is not more than Rs. 50,000 on your credit card. A low credit utilisation ratio helps your credit score and access to loans and credit cards.
3.Do not pay just the Minimum Due, make the full payment on your bill.
When you pay only the Min Due, as it is known, you end up racking up expensive interest costs on the unpaid amount.
Credit card interest rates tend to be high and you will pay in inordinate amount on interest charges if you make only Minimum Due payments. Avoid this unnecessary interest burden by spending within your income and paying off your bill in full every month.
4.Do not use your credit card to get cash advances.
It can be very tempting to use your credit card and avail of ready cash with a quick visit to the ATM. There are two very good reasons why you should not do this. The interest rate you pay on money withdrawn on a cash advance can be higher than the regular interest rate you pay on your credit card. Two, withdrawing cash on your credit card may also involve extra fees. It makes a lot more sense to save and build a small emergency cash buffer rather than pay so dearly for access to money.
5.Do not close old credit card accounts.
If you have repaid your balance and wish to consolidate your debt, it might seem like a good idea to give up one or more of your credit cards. Be aware that one of the factors that make up your credit score is the length or age of your credit accounts.
The older the account, the better for your credit score. If you do plan to give up a card, make sure that it is your most recent credit card so that you continue to reap the rewards of having an old account.
A credit card can be a great source of easy credit. Being aware of some of these potential mistakes to avoid will help you enjoy the tremendous benefits that a credit card offers.
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