If there is one financial product that has revolutionised the world it has be to credit cards. These small plastic cards have completely revamped the way individuals purchase and sell items. Credit cards also come with a lot of offers making it advantageous for customers to use this product. The number of credit card issuances are growing by the day and with the recent ‘demonetization’ ruling by the Indian government, the figures might just grow bigger as most individuals prefer going cashless while paying for their purchases. According to information provided by the Reserve Bank of India, individuals have also increased their dependency on credit cards for their debt related requirements.
As on 31st August, outstanding loans on credit cards were Rs.46,300 which was an increase of 28.7% as compared to 2015. This could be attributed to a number of reasons. One of the most common is that individuals fail to pay their due on time or just pay the minimum amount that is due. This can lead to their getting trapped in a vicious cycle of debt. While most banks function based on credit card spends, misusing these products can do more harm than good.
There are other mistakes that individuals make while using their credit cards which could affect them financially. The most important mistakes to avoid are given below -
Banks provide customers with the option to pay only the minimum amount due on their credit card bill during the end of their interest-free period. Additionally, the remaining amount can be carried forward to the next month. The catch here is that customers will have to pay an interest every month on this amount. This may seem to be a small inconvenience, however this amount can accumulate to over 35% on an annual basis. The amount that individuals would pay later will attract interest each month until the complete amount that has been paid.
Paying the minimum amount due seems to be the easy way out, however experts warn that this could lead to card holders falling into a debt trap which will have an impact on his/her credit score and also on their financial standing.
Individuals who wish to procure a luxurious product or service can do so through the option of Equated Monthly Installments or EMIs. Using this option that is provided by most banks, individuals can repay the amount that they have used on their credit card through Installments every month. The rate of interest charged on this is lower than the annual rate of interest that is charged by banks on outstanding amount in case of revolving credit. While rate of interest varies across banks, it is usually in between 13% to 18%.
Although this option is feasible, customers should not depend on it completely as well, as it could again result in their falling into a debt trap. Cardholders must also take into consideration the processing fee and other applicable charges.
Banks and lenders allow cardholders to withdraw cash from their credit card from any of the ATMs that are affiliated to that particular bank. While this might seem like an additional method to procure cash, the charges levied on this service is quite heavy. Interest rate on this is more or less equal to the rate that is charged for revolving credit facility. Unless individuals have cleared out their outstanding amount, cash withdrawal comes with a higher rate of interest.
Credit score is a 3 digit numeric representation of an individual’s credit worthiness. Compromising on this would result in pretty serious repercussions for the individual. If the cardholder fails to pay the due amount on time, it can negatively impact his/her credit score. Without a good credit score, it will be difficult for the individual to procure loans and other credit cards.
Credit cards work as temporary loan providers for individuals. However, this can also lead to individuals spending more money than they should. Indulging in excessive or unplanned spending is detrimental to the cardholder’s financial health. Repaying these would be a huge burden. Hence, only planned and necessary spending should be done through credit cards.
Credit cards are extremely popular and also very useful. However, misusing them can be just as bad. Credit cards also come with various offers and discounts on dining, fuel, shopping and other services. Using credit cards judiciously can enhance the customer’s credit report. By ensuring that they are careful regarding their credit card spends, customers can make the most of all that credit cards have to offer. Financial discipline should be given priority. If not, customers can get trapped in a viscous credit cycle of debt which will be hard to come out of. As long as cardholders do not follow the practises mentioned above and use credit cards wisely, they can enjoy all benefits of this financial product.
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