Ponder before the swipe

Sachin Vasudeva

A credit card comes with multiple benefits in the form of higher purchasing power and interest-free periods, along with rewards on usage.

However, it can also cause major financial distress, largely due to financial indiscipline or plain lack of awareness.

Here are the seven most common mistakes you can make while using your credit card.

Missing on-time payments

While credit cards provide you with higher spending power, they also come with a responsibility to repay the outstanding amounts on time. Lack of discipline in timely repayment of your outstanding card bill can be perhaps the biggest folly while using a card.

Not only would you be levied with hefty late payment fees and finance charges, but regularly missing your payment can severely impact your credit score. Non-payment and even late payment of your credit card bill is reflected in your credit report, which can also adversely impact your chances of getting a loan or a credit card in future.

Also, missing your credit card bill payment will eventually lead your to losing the interest-free period, as all new transactions will also start attracting finance charges from the first day, till the time you clear your outstanding dues.

Hence, it’s key not just to ensure you pay your credit card bills on time, but also have the discipline to spend only what can be repaid in full, on time.

‘Minimum due’ pifall

Along with the ‘Total Amount Due’, card issuers also provide an option to pay the “Minimum Amount Due” on or before the due date, to keep the card active and avoid late payment charges. This minimum amount due is a small fraction of the total due, usually about 5%. However, on paying only the minimum due, the unpaid balance on the card starts attracting finance charges which, in case of some cards, can go as high as 40% p.a.

When you revolve the balance to the next billing cycle, finance charges will also be levied on new transactions until you pay off the entire outstanding balance. This can rapidly increase your debt burden.

ATM withdrawal

Though withdrawing cash from an ATM using your credit card may seem like an easy solution for your cash needs, it is one of the costliest forms of borrowing. It attracts three types of charges.

Firs is the cash advance fee, which is usually about 3.5% of the amount withdrawn. Second, finance charges on the cash withdrawn, which can go as high as 40% p.a. And third, all new transactions made through the credit card after you withdraw cash also start attracting finance charges from day one.

This means once you have withdrawn cash using your credit card, you can no longer enjoy the interest-free period on your new transactions, till the time you repay the cash advance. While cash advance fee is a one-time charge, the finance charges will be levied every day until the amount is fully paid off.

If you withdraw cash and do not repay it quickly, you may end up paying a substantial amount in finance charges. Hence, cash advances on credit cards should always be considered as the last resort. A personal loan or loan against credit card can be a better alternative to meet financial exigencies.

Exhausting limit

If you exhaust the entire credit limit available to you regularly, it may adversely impact your credit score as your credit utilisation ratio (CUR) becomes extremely high. The CUR is a percentage of your total available limit that you are currently using.

If your CUR is high, especially when you are nearing or breaching the credit limit on your credit card frequently, you would be perceived as a credit dependent individual and this can impact your credit score negatively. If you are maxing out your credit card regularly, you can apply for additional credit cards or request your card issuer to increase your credit limit.

Interest-free period

One of the most important features of a credit card is the interest-free period. It is the period between the date of making a purchase and the due date of payment.

If you clear all your dues on time, transactions carried out during this period do not incur finance charges. Transactions you make at the beginning of your billing cycle will be eligible for a longer interest-free period. If you have multiple credit cards with varying billing cycles, you should spread your purchases across these cards in such a way that you can get maximum benefit of the interest-free period, especially when making big-ticket transactions.

Making high-value purchases at the beginning of your cycle will give you more time to pay them off.

Limit increase

Having a low credit limit on your credit card can be a big disadvantage as it restricts your purchases, even if you have sufficient repayment capacity. This also limits your chances of earning higher rewards through higher spends and pushes you towards a higher CUR. A higher limit, on the other hand, if used judiciously, can be very useful.

It comes in handy at the time of emergencies as well as gives you a higher purchasing power to make the most of deals and discounts during offer periods. The increased limit also brings down your overall credit utilisation ratio that can be a positive influence on your credit score.

Reward point expiry

Most credit cards come with a reward points programme wherein cardholders earn reward points, and the accumulated points can be redeemed for gift vouchers, merchandise or statement credit.

However, reward points have expiry dates, usually 2-3 years from the date of earning them. Your monthly credit card statement contains the details of points that are about to expire in the said month. It is important to keep track of the expiry of reward points so that you do not miss out on this benefit.

(The writer is Associate Director & Business Head (Cards), Paisabazaar.com)