A credit card is definitely an addition to your financial assets, but did you know that this little plastic card can cost you a pretty penny if not used in a disciplined way. The wrong usage of credit cards can turn the boons into bane, negatively affect your credit score and land you into major debts. While credit playing cards deliver a number of advantages for his or her customers, they will trigger important dangers for these missing monetary self-discipline. If dealt with carelessly, they will adversely affect your monetary well being for a very long time to time.
Here are 7 warning signs that indicate you are using credit cards the wrong way:
1. Maintaining Credit Utilisation Ratio (CUR)
CUR is the proportion of your total credit card limit utilised by you. Given that lenders generally consider consumers with a credit utilisation ratio of over 30 per cent as credit hungry, credit bureaus tend to pull down your credit score by some points when you breach this mark.
2. Constantly repaying the Minimal Due Solely
Many credit cardholders make a mistaken assumption that repaying solely the minimal quantity due would save them from paying heavy finance prices. Repaying the minimal quantity due would solely prevent from incurring late cost prices and taking a success in your credit rating. You will nonetheless incur hefty finance prices of 23%-52% p.a. on the unpaid part of your credit card invoice. Moreover, non-repayment of credit card dues results in the withdrawal of the interest-free interval on recent card transactions till your complete unpaid part is paid off.
In case you’re unable to repay your complete credit card dues, convert the unpayable part into EMIs. The curiosity rate of EMI conversions are a lot decrease than finance prices levied on unpaid dues. This choice provide compensation tenures of 3 months to 5 years, permitting card holders to repay unpayable credit card invoice at a lot decrease curiosity rate in smaller tranches as per their compensation capability. Moreover, choosing this route even reinstates the profit of interest-free interval on credit playing cards.
3. Missing Regular Payments
Credit Card users are required to make the minimum payment on or before the due date every month. If you are missing regular payments because you are not left with enough to clear the dues, you are surely using the card more than you should. Doing so cannot just attract a penalty but can also hurt your credit score.
4. Not paying attention to Reward Point’s Expiry
Card issuers attract more consumers by extending attractive reward points on credit cards. While some allow the option to adjust accumulated reward points against the outstanding bill of the credit card, others allow redemption for availing pre-specified services and products, such as gift vouchers, airline tickets, consumer goods, fuel, etc. However, given that the reward points of most credit cards come with a pre-determined expiry period of generally 2-3 years, you must avoid ignoring their expiry, as this could result in losing out on the accumulated reward points’ benefits.
5. Making Cash Withdrawals through Credit Card
Cash withdrawals utilizing credit playing cards appeal to money withdrawal charges of as much as 3.5% of the withdrawal quantity. Additionally, card issuers additionally levy finance prices of as much as 52% p.a. proper from the withdrawal day till their compensation. Hence, attempt to keep away from making money withdrawals by means of credit playing cards to the extent doable. In case it turns into completely unavoidable, be sure you repay your complete withdrawn quantity as early as doable. Doing so would cut back extra curiosity price incurred within the kind of finance prices. Withdrawing cash though your credit card attracts not one but twin charges. Cash advance fee of as high as 3.5 per cent of the withdrawn amount, and hefty finance charges ranging around 23-49 per cent p.a. are levied, right from the day of such withdrawal until the repayment is made. Incurring these two charges together can burn a deep hole in your pocket, especially if done frequently.
6. Turning down Credit restrict Enhancement
Many credit cardholders usually keep away from growing their credit card restrict owing to the worry of overspending and the chance of touchdown right into a debt lure. However, observe that if judiciously used, this can assist you enhance your monetary well being. Hence, you could take such credit restrict enhancement provides into consideration each time it’s provided to you by the card issuer.
Doing so would improve your monetary capability to face monetary emergencies or make increased spends throughout festivals or any necessary event. Also, keep in mind that an enhanced credit restrict can cut back your CUR, which can assist enhance your credit rating and thereby, your future mortgage and credit card eligibility.
7. Frequent Balance Transfer
If you are trying to reduce your debt burden, one of the best ways to use a credit card is to use the balance transfer facility and switch to another card with a lower interest rate. Know that balance transfer is not a permanent solution to the debt problem but only a way to delay the problem. Use this facility, and it can be instrumental but overusing it can inevitably result in grave consequences.
10 ways to pay off your Credit Card Dues
Credit cards offer an instant solution to cardholders with most of their purchases and problems. Almost all banks offer a wide range of credit cards for different needs. Credit cards, when used recklessly, are a certain one-way ticket to a debt trap. But the same card, if used smartly, can actually buttress your financial needs and afford you that much-needed breathing space as you manage your money.
1. Consider Balance Transfer facility
If you are already caught up in a bad debt cycle, the option of balance transfer or transferring your dues from one card to another is the best option for you.
2. Make a note of all the Debts to be paid
Instead of looking at your credit card bill at once, which is a lot, break it down into smaller parts. This helps you to categorize it. If you hold more than one credit card, it is advisable to pay off the bill which is on priority.
Now how do you differentiate which bill needs to be paid first? It depends on two criteria which is the interest rate of the card and the outstanding bill.
If you have only one credit card and a total bill of Rs.20,000 for example. It is a better strategy if you divide it into 4. This becomes easier if you see and know that you must pay Rs.5,000 instead of Rs.20,000 at a whole.
3. Convert payment to EMIs
If you are finding yourself unable to repay your credit card outstanding amount, talk to your bank and request for converting your outstanding amount into monthly EMIs. Banks, however, charge a monthly interest of 2-3% for allowing the EMI facility. There will be also a processing fee, which will be around 1-2% of the outstanding amount.
4. Liquidate your Investments
This is something you should seriously consider, as should be kept as the last resort. Even though you will be earning interest from your investments, a credit card debt attracts around 36 to 40 per cent interest per annum, which is almost double of what you will earn from your investments.
Hence, experts suggest breaking low earning investments such as FDs to pay off the credit card debt. Breaking off an investment should only be looked at in rare cases.
5. Paying the Card bill with the least balance
Once you pay off the credit card bill with the higher interest rate, you can switch to the card with the least balance pending.
This completely depends on what bills have accumulated and on which card. It might not always be this way. Sometimes, the bill which is the lowest might be with the card which has the highest balance. In that way, you are clearing off two important bills.
Once you are done with clearing the credit card with the highest interest, you can shift to the bill which has the least pending balance. Paying this provides you with a much-needed mental boost of clearing the rest of the bills.
6. Taking a loan to Pay off Credit Card Debts
If your credit card bills are too much to pay off even in installments, there is another option by which you can pay it off at one shot.
If you have a good credit score, you can apply for a personal loan to clear off all your credit card bills at one go. In this way, you can be debt free and will be paying lesser interest. Personal loan interest rates are comparatively lesser than credit card interest rates. Apart from this, depending on the tenure, your monthly EMI will be a nominal amount as well.
7. Pay off debts with the Highest Interest Rate first
This is something which people forget to consider. When you have debts on more than one card, most people would consider paying the one with shorter due date first. Clearly, this is a wrong tactic. Clear off debts on the card that charges higher interest rate first. This way, you reduce your total interest outgo since unpaid dues with higher interest rates accumulate interest faster.
8. Consider opting for Automatic Payment Facility
Since credit cards come with high interest rate and late payment fee, opting for an automatic payment facility is recommended to avoid missing bill payments on time. This way, the bill amounts may get deducted from your account without your manual intervention and you need not worry about missing repayment deadlines even if you are travelling or not having access to your bank.
9. Snowball is another way by which you can pay off your credit card dues
This method helps the cardholder payoff the dues steadily one after the other, therefore easing the repayment burden. This way you can start to clear off smaller dues first.
Note that, clearing balance from a single card can help you improve not only your credit score but also the credit utilization ratio.
10. Top-up loans can also be opted by cardholders
This is for those who have an ongoing existing home loan. Borrowers who have been regular with their home loan for more than 2 years successfully, can go for this option of a top-up loan.
Once you apply for a top-up loan, the bank/loan provider conducts due diligence on the property. Once the loan is approved, you can use the money to pay off your credit card debt. The rate of interest of the top-up loan is close to the rate of interest of the home loan. There is no tax benefit linked with the top-up loan.