Credit card is a great spending tool if used responsibly. It is an effective option to build up and maintain a healthy credit score for future borrowings. Hence, it would not be wrong to say that if used sensibly, a credit card helps in improving your financial health. However, while we hear a lot about their benefits, no one talks about healthy credit card habits to follow. Late payments or using your credit card beyond its credit limit could be bad for your financial health since it downgrades your credit score. It is thus important to understand all aspects of any credit card before buying one for yourself and is equally crucial to have healthy habits while using it.
In this article, we discuss a few bad credit card habits that can result in mounting debts. In case you are following any of these bad habits, now is the time to replace them with a healthy one.
Not Paying Attention To Credit Card Statement
Going through your credit card statement may sound boring or time-consuming, but practising this habit can have serious benefits for your financial health. Checking your credit card statement regularly will help you spot any fraudulent transactions and billing errors. Your credit card statement is a summary of transactions done by you and has detailed information about your purchases, payments, balance transfers, interest charges, fees, available credit, new balance and the due date of the billing period. A good credit card habit involves an understanding of the credit card statement and reporting any error to the issuer to avoid a further financial mess.
Using Credit Beyond Your Limit
Credit cards give you financial freedom and enable you to make big-ticket purchases. Another avoidable credit card habit is to use it beyond your repayment capacity which unfortunately is a sure-shot recipe for financial disaster. Ideally, you should spend 30% of your outstanding balance to maintain a healthy credit card habit. So keep a track of your spending and update yourself about the credit limit regularly as a healthy practice.
Not Paying The Full Bill On Time
Credit cards come with this tempting offer of making the minimum payment each month. This enables you to pay a fixed amount, which is usually 5% per cent of your balance. Paying just the minimum amount may seem to be a great solution for your high debt, but it is a temporary solution. You will continue to be in a credit card debt and though this small payment may save you from a late payment penalty fee, you may have to shell out more as interest charges for the remaining balance. A good credit card habit is not to make partial payments but full payments and spend as per your affordability.
Withdrawing Cash Through Credit Card Advances
Credit cards also provide the option of providing you instant cash whenever there is a need. Relying on this option other than during emergencies is not a great credit card habit. Withdrawing cash through a credit card, also known as credit card cash advance involves higher charges than withdrawing through ATM cards. Unlike the regular use of credit card, cash withdrawals do not come with an interest-free period and you will have to be charged based on the amount withdrawn or a fixed charge per transaction in the range of 2-3%. It is thus wise to avoid cash withdrawal from your credit card and instead opt for a personal loan or loan against credit cards.
Multiple Credit Cards And Not Using Them
While it is a good idea to possess multiple credit cards since it helps in increasing your spending limit and lowering your credit utilisation ratio. However, if you do not make timely payments for all the credit cards, it is bad for your financial health. Also, if you have multiple credit cards but aren’t using all of them regularly then you are shelling out unnecessary fees for holding that particular card. Besides, all late payments attract penalties and a hefty interest rate on the balance, resulting in high debts. A good credit card habit is to keep track of all your transactions done through multiple credit cards and making timely repayments.
Last but not the least, keep track of reward points to enjoy the benefits that come along with a credit card. But that does not mean you should possess a credit card only for reward points.
The writer is CEO, BankBazaar.com
BankBazaar.com is India’s leading online marketplace for loans and credit cards.