Credit cards are very useful financial instruments which help you make big ticket purchases and pay for them later. But, there are some traps and pitfalls you have to avoid while using credit cards. Also, you should use your credit card smartly to get the maximum benefits.
Do You Know?
| According to The National Crime Records Bureau, there have been 3,432 credit and debit card fraud cases reported across India in 2021. This has increased by almost 20% from the previous year with Telangana and Bihar being the worst affected.
Credit card debt has also been upsurging steadily since the pandemic. |
Here are the ways to use A credit card smartly
#1 Fix The Spending Limits on All Your Cards
You can avoid misuse of your card by assigning limits for your spends. This is especially important if you are using the tap or wifi feature on your card since a single tap will debit money instantly. So, set a low limit of Rs. 1,000 or 2,000 for tap transactions. For the swipe feature that requires a PIN for authentication, you can set higher limits. This can be used for buying anything expensive. It is also essential to set limits for all your transactions whether online, international, or daily.
#2 Two-Factor Authentication
Make sure that you have opted for the two factor authentication process. This is when you receive an OTP on your mobile phone or your email Id to authenticate any card transaction. In India, you get SMS alerts whenever your card is swiped.
So, if you become aware of any unauthorized transactions, you can block the card by calling the bank’s customer care service or through netbanking/mobile banking. Next, raise a complaint with your card issuer within the next 48 hours and report the fraud to the national helpline 1930. If the bank verifies that your card has been used fraudulently, it will reimburse the money.
#3 Deactivate The Overseas Transactions
Online purchasing in India is usually done after entering an OTP. But, international websites don’t send an OTP which can be very risky. So, if you are not traveling abroad or don’t have to purchase overseas, you can deactivate the international transaction feature on your card instantly. In this way, it will not be misused by anyone else. This feature can be reactivated whenever you desire.
#4 Avoid The Minimum Amount Due
The minimum amount due is not the actual payment. It only allows you to continue using your credit card. Just paying the minimum amount due and not paying the entire bill will attract very high interest. This can range from 24% to 46% yearly. Accumulating your bills will build substantial debt over time. Also, if you carry forward the balance on your credit card bill, the credit card issuer will charge an interest of 2 to 4% not only on the amount outstanding but also on any new buys in the coming months.
#5 Use The Autopay Option
You can ensure that you don’t miss out on a payment by using the autopay feature on your card. You can opt to automatically pay the minimum amount, a set custom amount, or the full payment. If you cannot pay the entire bill, ensure to pay at least the minimum amount due.
In this way, you will not incur a penalty for non payment, and your credit score will not be impacted negatively. However, don’t get into the habit of paying only your minimum amount due since you will accumulate sizable debt over a period of time. Even if you have opted for autopay, you should still review your credit card statement and check that you have the funds needed for the auto deduction. Else, your bank will levy a return payment fee. Defaulting repeatedly on payments can affect your credit score negatively.
#6 Card Based on Spending Patterns
Credit card issuers attract customers by offering a variety of joining perks and co-branded deals. So, you have to be smart about choosing which works the best for you. Your card utility should match your spending habits.
#7 Have The Ideal CUR
Have a low CUR to improve your credit score. It shows how much of your available credit you are using. If your total credit limit on all your cards is 5 Lakhs and your outstanding amount is only 50,000, then your CUR will be 10%. But, if your outstanding amount is 2 Lakhs, then the CUR becomes 40%.
This is high. An ideal CUR should be below 30%. The best CUR is one which is below 10%. Having more than one credit card helps in getting a higher credit limit and also having a lower CUR. This will help in building your credit history and maintaining a good credit score. This in turn will help you get credit easily in the future and have a higher credit limit.
#8 Avoid Conversion of Credit Card Transactions to EMIs
Credit cards can be used to make big ticket purchases with just a single swipe. These purchases can be converted into EMIs. These are credit card loans and can be repaid between 3 months to 3 years. However, credit card loans are the most expensive, unsecured loans.
The interest rates for them are quite high and range between 13% to 24%. If you have a good credit history, you can get a consumer finance loan or personal loan. These are cheaper options with interest rates ranging between 8% to 20%. You can even consider an overdraft facility on your salary account or fixed deposit since these have even lower interest rates of 3% to 8%.
Here is a comparison between credit card loans vs other cheaper options
Purchase amount: 2 Lakhs Tenure: 1 year
| Type of Loan | Interest Rate | Average interest rate considered | Total amount paid |
| Credit card EMI | 13 to 24% | 18% | 2,20,032 |
| Personal Loan | 8 to 21% | 11% | 2,12,116 |
| Overdraft | 3 to 8% | 5% | 2,05,457 |
Also another reason for opting out of credit card loans is that the entire purchase amount will be blocked against your credit card. This will lower your credit limit, increase your CUR, and impact your credit score negatively.
Conclusion
Credit cards should be used smartly and responsibly. When used properly, it will help in building a credit profile and give you multiple rewards and benefits.