The usage of credit cards is rising like a tide in India with banks moving on an overdrive to sell them. Unfortunately, young people are taking to credit cards, but most of them are ignorant of how to use them prudently. It has led to huge number of credit card defaults. As a result, at the end of FY24, the total number of cards was at 10.18 crore, while in the last month of the last financial year as many as 12.02 lakh cards were added, which worked out to 1,615 cards an hour throughout the month.
The runaway growth of credit cards and the resultant unpaid dues have alarmed even the Reserve Bank of India (RBI). In this situation, what is the prudent thing to do when you get offers from banks to take their credit card? Just remember, credit card default can cripple your financial life before doing anything.
Rein in your impulse to use your credit card
If you have a credit card, the first thing you should do is to rein in your impulses – to shop, eat, travel and even withdraw cash from an ATM. Else you might simply land up in a debt trap.
Avoid late payment on your credit card
Paying bills on time and not missing credit card payments must be ensured by all users. If you make payments late, you will pay penal interest charges that can be shockingly high.
Perhaps worse, late payment would also adversely affect your credit score, which immediately reduces your creditworthiness.
Ideally, the entire bill should be paid at one go. If not, more than the minimum due amount should be paid off. If expenditure is incurred regularly, clearing credit card balance every month is a prudent choice. It also helps the card user to avoid interest.
How many credit cards are enough?
Though a number of banks might bug you with incessant phone calls, avoid taking too many credit cards. Using multiple cards will make it difficult for anyone to keep track of cards and expenditure and statements. One or two cards can ideally serve anyone’s purpose.
Check interest rates on credit cards
It is also crucial to check the interest rates a credit card carries. Most cards bear interest rates that are as high as between 30% and 45%. Needless to say, if your card has a relatively low interest it pinches your pocket less if you carry over a balance each month.
Never withdraw cash
If you are also using a debit card, this is something you must not forget. Never use your credit card to withdraw cash from an ATM – always take out your debit card inside an ATM. The underlying concept is that while using a credit card, you are taking loans from the bank (and not withdrawing your own money as is the case with debit cards). Moreover, there is no grace period and interests will become payable from the date one withdraws cash.
Never exceed credit card limit
A very vital ‘Don’t’ is not to exceed one’s credit limit. Every credit card comes with a credit limit. The rule of the thumb is not to spend more than 30% of the credit limit.
In fact, staying a bit lower is recommended. It also helps in improving the credit score.
Using a credit card without sparing a few minutes to read the statement that you get is fraught with danger. One must read a credit card statement to understand the transaction details, payment information, fees, interest rates. Rewards earned is also another area one must read.
Not a licence
Remember that the credit card is not a license to spend, but merely a tool of borrowing money. The convenience lies in the ease of transaction, not in eliminating or limiting, a bit of the liability that any loan heaps on your shoulders. So, never spend a rupee more than you can afford.
Another point to keep in mind is that one should not pay off a debt with a credit card. It merely compounds the liability.
There is a saying that credit cards are like “plastic grenades” that must be handled very carefully. It would be advisable to remember it.
Credit cards are a great liberator. But they are also double-edged swords which can hurt you if you don’t know how to wield them. Most importantly, beware of credit card default. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
