When managed smartly, credit cards can help you save big on your regular spends in the form of rewards, cashback or direct discount. You can find credit cards that cater to different categories like travel, dining, online shopping, fuel, etc. which could help you get additional benefits on your preferred spending categories. However, if used recklessly, credit cards can cost you a lot in the form of interest charges and other penalties. To help you make disciplined use of credit cards, we have made a list of some common credit card mistakes and the steps you can take to avoid them.
Missing credit card payments
Missing a credit card payment does not only lead to high interest charges and subsequent debt but can also damage your credit score. Whenever you miss a payment, interest charges are levied on your unpaid balances, which can go up to 45% p.a. or even higher in some cases. Since interest on credit card is compounded daily, the debt will continue to increase every day.
Missed payments show up in the ‘Days Past Due’ (DPD) section of your credit report, along with the number of days for which your payment was delayed. For example, if, for the month of January, you paid the balance 5 days past the due date, the DPD section will have the number 5 written in the month of January, usually marked in red.
Since payment history is given the highest weightage in your credit report, consistent missed or late payments can have long-lasting effects on your financial health. To avoid this, you can set up automatic payments or a reminder so that you don’t miss out on the due dates.
Paying only the minimum amount due
If you are facing difficulty in paying off the total amount due on your credit card, issuers give you the option of paying a minimum amount and revolve the remaining balance to the next billing cycle. If you pay the minimum amount due on time, your credit score is not affected negatively. However, when you pay the minimum amount and carry forward the outstanding balance to the next billing cycle, interest charges accrue on the remaining amount. Moreover, when you have outstanding dues on your card, new transactions will also attract interest charges from the very first day. Since credit card interest rates are quite high, this can quickly lead to a debt pile which will be difficult to pay off. Therefore, it is strongly recommended that you always pay the total amount due on your card on or before the due date.
Withdrawing cash from your credit card
One of the major mistakes to avoid is taking out a cash advance on your credit card. While it may seem like a quick and easy solution when you do not have enough money, cash advances do not qualify for the interest-free period. This means interest starts accruing as soon as you withdraw cash. Some issuers might charge a higher interest rate on cash advances as compared to that on regular purchases. When you withdraw cash, new transactions also become ineligible for the interest-free period.
In addition to the interest, a one-time cash advance fee is also charged every time you use the facility. Some card issuers charge a flat amount while others charge it as a percentage of the amount withdrawn. These charges can quickly lead to the accumulation of debt. To avoid this situation, it is advisable to create an emergency fund or explore other options, like a short-term loan with a comparatively lower interest rate, instead of withdrawing cash from your credit card.
Applying for multiple credit cards at a time
Another common mistake that individuals tend to make is applying for multiple credit cards within a short span to increase their purchasing power. However, this can have adverse effects, as applying for multiple credit cards at a time can negatively impact your credit score. Each new credit card application raises a hard inquiry. While a single inquiry may not have significant consequences, multiple inquiries within a short period of time can negatively impact your credit score. Hence, it is important to be selective when opting for credit cards; only apply for credit cards that align with your needs and requirements.
Frequently maxing out your credit card
Frequently maxing out your credit card can negatively affect both your credit score and financial flexibility. It increases your credit utilization ratio, which shows that you are overly dependent on credit and are having difficulty managing your finances. Maintaining a good CUR not only improves your credit score but also ensures credit availability during emergencies. In addition to this, card issuers also charge an overlimit fee when you surpass your credit limit, contributing to the risk of falling into a debt trap. To avoid maxing out your credit card, consider requesting a credit limit increase from the card issuer or opting for an additional credit card to increase your overall credit limit.
Closing a credit card
The length of your credit, i.e., how long you’ve held open cards, has a direct impact on your credit score. Closing a credit card, especially one with a long credit history, can affect your credit score. The average age of credit history gets reduced whenever you close a credit card. For example, if you have a card with a 5-year history and another with a 2-year history, you’ve had an average account age of 3.5 years. If you close the credit card with a 5-year-old history, your average age of credit reduces to 2 years. Hence, to maintain a healthy credit profile, it is advisable not to close your credit card accounts, as it reduces the average account age. The only time when closing a credit card might be justifiable is when you are charged an annual fee that is not outweighed by the card’s benefits.
Related Read: The Safe Way to Cancel a Credit Card
In addition to the above-mentioned mistakes, credit cardholders also fall into the temptation to overspend with the ease of buying now and paying later, which can result in accumulating debt and financial stress. Responsible credit usage is important to maximize the benefits of credit cards.