With the government of India promoting cash-less transactions, more people have started using plastic money instead of cash. According to the Reserve Bank of India(RBI), ~30million credit cards have been issued as on March 31, 2017 as against the previous high of 28 million cards in March 2008.With a credit card, comes great responsibility. As a consumer of credit cards, you should be extremely disciplined in not only spending but also with the payments to continue enjoying the credit facilities from financial Institutions. We have figured out a number of risks involved in using credit cards and the ways to minimise them. Let’s explore them:
Unreasonable spending: Credit Cards come with special offers. Cashback, reward points, and discounts are some of the lucrative features which compel you to do unwanted expenditures. Easy availability of credit pushes the desire to consume or buy more.
Ways to Avoid: The only way to overcome unreasonable spending is to exercise more financial discipline. Do not spend unless it is needed. Do not get lured with the discounts, cashback offered by the card issuer or the sellers. Keep a tab on your outstanding credit limit. Avoid impulsive buying decisions.
Lowering of Credit Score: Delay in making credit card payment is similar to delay in paying EMIs of loans. The credit card issuer reports the payment status to the credit bureaus like CIBIL, Equifax etc and if the payments have been delayed beyond the due date, they tend to pull down your credit score. Not only the delayed payments but the credit utilization ratio also can be a reason for lowering of your credit score. If your credit utilization is above 40% of the credit limit assigned to in your credit card, it reflects your over-indebtedness. Your credit score tends to fall if this threshold limit of 40% is breached.
Ways to Avoid: It’s always good to pay your full credit card bill every month. Opt for auto debit from your bank account to avoid late payment fees and finance charges. If you are exceeding the 40% mark frequently, seek for a credit limit increase on your credit card. Alternatively, you may apply for another card to keep the credit utilization per card below 40%.
3. Fraudulent Usage: Credit card fraus usually happen by way of phishing or cloning/skimming. While phishing is done through emails or phone calls made by fraudsters seeking your credit card number along with the CVV and expiry date of the card. At the point of sale (POS) terminals or ATMs frauds may happen by accessing your card details through the swipe machines. At times they use your personal details (identity theft) to avail a new card in your name.
Ways to Avoid: Take care of your credit card just like you take care of your cash. Never share any of your credit card details over phone or email with anyone. RBI or any Bank would never ask for disclosing your sensitive credit card details over phone or email. Pull your credit report at least once in three months to detect identity theft. Inform your credit card issuer about any suspicious transaction or loss of your credit card immediately.
4. High-Interest Rate: If you withdraw cash from an ATM using your credit card or you spill over the amount due beyond the due date by paying just the minimum amount due(MAD), the card issuer charges a very high-interest rate. This is called finance charge. These charges can be as high as 46% per annum. Some of you may delay the full payment of credit card bill due to financial constraints, but some may even delay it due to sheer carelessness or misconception about the minimum amount due(MAD). Paying the minimum amount due is a bad idea if you have funds with you. It only helps you in overcoming late payment fees but burden you with the finance charges. If you fail to pay the full amount due, the interest-free credit facility for the billing cycle is withdrawn and interest is charged on every transaction you make.
Ways to Avoid: ATM cash withdrawal through credit card should always be avoided. Try to make the full payment of credit card bill on or before the due date. In case there is a bigger transaction done on your credit card, get it converted to EMIs rather than deferring the payment by paying the MAD. Unless you clear the full amount due, do not transact on the same card.
5. Card mismatch with lifestyle: With a wide variety of cards available, you should explore the features, fees(both joining and annual fees) and analyze it with your expenditure style before selecting a card for yourself.
Ways to Avoid: Do not choose a card on the basis of joining perks being offered. Do the cost-benefit analysis before applying for a credit card.
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