7 Credit Card mistakes you didn't know you made
Introduction
Credit Cards work on the general principle of buy now and pay later. Apart from providing instant credit access, the cards also offer a host of other privileges, including cashback, reward points, discounts, and more.
When used wisely, credit cards can be a powerful financial asset. You can boost your credit score and other benefits by spending less daily. But if you are not financially disciplined, you tend to misuse your credit cards which leaves you in higher financial distress. Here are some common credit mistakes and tips on how to avoid them:
Making Late Payments
Paying your credit card debts late damages your credit score and may negatively impact your credit card issuer. A month’s late payment could reduce your credit card score by 100 points. Imagine you are late for three months or more. You also risk accumulating APR on your delinquent payments, increasing your debt profile.
Only Paying the Minimum Amount Due
Credit card issuers make it convenient to repay your balance by allowing minimum payments. However, paying more than the minimum amount is preferred when you can afford it.
Paying the minimum amount and revolving the credit to the next cycle can damage your finances like any missed or late payment. This is because interest is levied on the unpaid balance. When you pay only the minimum amount, the interest charges will be levied on the remaining balance. Paying the minimum can add more months — even years required to pay off your debt.
Not knowing your APR and applicable fees
When you apply and are approved for a credit card, you receive a long cardmember agreement that probably doesn’t top your must-read list. However, you must parse through the jargon and review important account terms to understand all the applicable fees.
Here are some key terms to look out for and what they mean:
- Annual Fee: The yearly fee charged for holding a card.
- Purchase APR: The annual percentage rate is the yearly interest rate purchases are charged when you carry a balance month-to-month Divide by 12 to get the monthly interest rate.
- Late Payment Fee: The amount you are charged over and above the interest on the outstanding amount you owe for missing monthly payments.
- Foreign Transaction Fee: Purchases made outside India often incur a fee, typically 2.5% - 3.5% per transaction.
- Balance-Transfer Fee: When you transfer debt, you’ll often incur a 3% to 5% fee.
Not Reviewing Your Account Statement
One common but easily avoidable mistake you can make on your credit card account is to overlook checking your account statement regularly.
Reviewing your credit card account periodically allows you to know the status of your account and prevent reporting or charging errors and potential frauds from taking advantage of your account.
If you cannot keep up with a weekly review, you should do a monthly account review to keep up with your bills and know the status of your account.
Having Too Many Credit Card Accounts
This might be a good idea in the short term because it gives you enough options to source lines of credit to cover your expenses. However, in the long run, what this means is that you will not be able to keep up with the accumulated debt on different credit card accounts.
These accounts will also charge APR, which means more debts. Also, when you apply for a new credit card, the card issuer may enquire about your credit cards, and too many inquiries may spook your existing lenders.
You can take advantage of Pre-qualification forms, which allow you to check if you qualify for a new credit card without damaging your credit score.
Taking Cash Advances
Taking out a cash advance is one of the costliest things you can do with your credit card. It may look like the most convenient way of getting some cash at your disposal, but it is also the most expensive one.
As soon as you withdraw the cash, the interest starts accruing on the amount withdrawn. Also, cash advances on credit cards attract an additional fee. Some banks charge a flat amount, while others charge a percentage of the amount withdrawn.
For example, the cash advance fee on HDFC Regalia is 2.5% of the transaction amount.
Maxing Out your Card
Using the majority, or all, of your available credit, is never a good idea. The amount of credit you use plays into your utilisation rate. The higher the utilisation rate, the lower your credit score.
If you frequently charge close to your monthly limit and have no problem paying off your bill, you can call the credit card company and ask for a credit increase.
FAQs
What is APR?
The annual percentage rate (APR) refers to the yearly interest you pay on your borrowed amount to your credit card provider.
Who Issues Credit Scores in India?
The Reserve Bank of India has provided authorization to companies that have registered under The Credit Information Companies (Regulation) Act, 2005 to provide credit scores or ratings based on the past performances that have been reported by numerous member credit institutions and banks. CIBIL or Credit Information Bureau India Limited is India’s leading credit information bureau.