Five signs of incorrect Credit Card use

A credit card is a financial instrument that allows you to borrow funds within pre-approved limits. Given its convenience as a payment tool, there has been a surge in credit card use over the past decade. Another benefit is that a disciplined approach to credit card use and prompt payment can improve your credit score and consequently, your borrowing ability. However, using a credit card carelessly can impact your borrowing ability in the future.

If you are guilty of doing any of the following regularly, it is time to make amends:

• You pay only the minimum amount due

All credit cards offer the benefit of paying only the minimum amount when the credit card bill is due. It is convenient, as it defers the dues and interest charges. However, this practice can land you in a credit card debt trap as you incur heavy interest charges on the total amount until all the dues are cleared. You can prevent late payment fees but the credit card debt trap takes hold of your finances. Remember, the interest rate on credit card can vary anywhere between 30 and 40 % per annum

• You over-utilise the credit limit

The credit utilisation ratio (CUR) is the ratio between the total credit limit available on your credit card and the actual credit you avail of or how much you spend on your credit card. If you constantly avail the entire credit limit available, it leads to over-utilisation of the credit limit. This may make you appear credit-hungry to your card issuing company. A CUR of over 30% may trigger the bureaus to reduce your credit score. Experts suggest maintaining a credit utilisation ratio below 30% to maintain a good credit score.

The ideal ratio can be maintained by requesting an enhancement of the credit limit on your existing card or getting a new card. Credit enhancement on the existing card might also be offered by the bank if your credit score remains stable.

Knowing your spending pattern, you can go for a card that provides benefits on spending, like the Axis Bank Freecharge Credit Card. It offers an annual fee waiver on a certain amount of spending.

• You use the credit card to withdraw cash at an ATM

The cash withdrawal limit for a credit card is a subset of the credit limit. It is usually negligible for the first 180 days. You will incur a withdrawal fee and a heavy finance charge. This is levied from the day the cash is withdrawn. The charge is excessive and must be avoided. If this is the only option left, you must commit to paying the amount withdrawn as soon as possible.

[Also Read: The Perfect Credit Card for the Traveller in You]

• You do not utilise the reward points awarded

Reward points are awarded for certain purchases or spending using your credit card. These points are not valid forever and generally have a validity of 1 to 2 years. Tracking these points and converting them into vouchers or making payments using these points is an ideal way of saving money and utilising less of your credit limit.

• You do not make the most of the interest-free period

Axis Bank offers a grace period ranging from 20 to 50 days. It is an interest-free period, provided the total amount due of the previous bill has been paid. So, if you plan your spending during the start of the billing cycle, you can enjoy the longest duration of the grace period.

Conclusion:

Knowing the red flags of credit card use can help you avoid them. Use your credit card prudently to make quick and instant payments securely as well as build your credit score

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.