Credit card usage tips & mistakes to avoid

Let us understand how one should take maximum advantage of credit cards while avoiding the many pitfalls.

October 31, 2019 12:37 IST | India Infoline News Service
Credit cards are convenient for paying expenses and come with various rewards and perks. Used responsibly, a credit card can be a very helpful financial tool. Making consistent, on-time payments can boost your credit rating, and some cards offer rewards for purchases or even a 0% interest rate for a short period of time on balances transferred from other credit cards. So, how should one take maximum advantage of credit cards while avoiding the many pitfalls?
Avoid keeping balance on your credit card, make full payments:  This is the holy grail of credit card use. You should pay of your bill in full every month, instead of carrying it over to the next cycle. As long as you pay your balance on time and in full every month, you will never pay a dime in interest or fees. What’s more, apart from the month-long cost-free credit, you get reward points and bonus points for using the card. Resist the temptation to spend more than you can pay for any given month, and you’ll enjoy the benefits of using a credit card without interest charges. Missing a payment could result in a late fee, penalty interest rates and a negative impact to your credit score.
Do not use it for cash withdrawals: So many people make this mistake. Though your credit card does provide you with the convenience of withdrawing cash, there is a huge difference between taking out cash from a debit card and that from a credit card. Unknown to most, when you withdraw cash from your credit card at the ATM or at a branch, there is a steep service charge of 3-4% on the value of the withdrawal. This is a huge cost, not to mention the additional interest cost and GST charges on the withdrawal. Hence, credit card must be used as a last resort as far as withdrawing cash is concerned.
Exhaust your credit card points: As a credit card holder, you often get messages and emails from your bank about accumulated reward points on your credit. Credit card rewards such as points toward shopping, airline miles, or access to exclusive clubs are popular. A card that offers cash rewards may also help you save. Remember, these credit points have an expiry date and if not utilized within a stipulated date, they expire and become worthless. You can, and should, redeem these points either online or at select outlets. In fact, many of the discretionary items on your list can be bought by utilizing these bonus points.
Use the card for needs, not for wants: A credit card should be used carefully. Unwanted and impulsive transactions can lead to debt. It should be utilized for a specific purpose or for an emergency. If the card is not assigned to a particular task and used frivolously, there is a tendency you will overspend, which will create a havoc with your finances and credit score. Use the credit card as a temporary loan to yourself, and then pay back the amount as soon as you can to decrease or avoid interest charges altogether.
Make wise use of your card’s billing cycle: All credit cards have a grace period to pay the bill. If you make your bill payment within the grace period, you will not be liable to pay any interest charges. If utilized smartly, the grace periods can provide quite an advantage.  If you have a grace period of 40 days to pay your credit card bill, then, for a billing cycle which starts at 1st of every month, the due date would be 10th of the next month. Hence, if you make a purchase at the 1st of the month, you will get the entire 40 days’ grace period to pay the bill. Paying bills on or before the due date means you don’t have to pay any interest.
Be careful while cancelling a credit card: Canceling an older card can, at times, lower your credit score. This is because lenders care about your credit history, and the longer that history the better. Closing an old credit card can damage your credit if you’re not careful. If you have high balances across your other credit cards, losing that available credit could spike your credit utilization and cause your credit score to dip. So, if you are planning to cancel a credit card, make sure to pay off some of your existing debt before doing so.
Keep a check on your credit card statements: Keep a definite check on your credit card statements. Make sure that you are billed only for the purchases you have actually made. Take a look at your credit card bill to see exactly where your money went and whether it was in line with your goals for the month. Flag any unusual charges to the company. This simple practice will help you to keep a tab on your spending and plan better for the future. Also check your free credit report online frequently. A credit report is like a report card of your credit account. It also has a credit score, given to you by the credit bureau. This will help you ensure that all the information in your credit accounts is accurate. It will also help you know if you have been missing any payments, or EMIs.
Set up automated payments for credit card: While everyone intends to pay off their bills on time, we all make mistakes and it can be easy to slip up. Auto-debit is a perfect solution to avoid such situations. But make sure that the amount debiting is always more than the minimum due amount.
Keep within your limits: Make sure that you can afford what you buy, even when you buy on credit. You want to be able to afford the loan payments, and before you buy anything with a credit card, save up for it so you can pay off the balance. In case you feel you have a tendency to overshoot your budget, ask the card company to reduce the limit on your credit card.
Keep your debt level low: While you do need to borrow for some things, such as a home, car or education, it is important to try to borrow only what you need. Try to borrow as little as possible. Your total debt payments should be no more than 30% of your monthly income for a better credit score.

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