The mistakes to avoid when using a credit card

As per a recent report by the Reserve Bank of India, credit cardholders spend three times more money via credit cards online than they do offline. For credit cards, the spending stands at Rs 14500 whereas it is only Rs 700 for debit cards. While spending money via credit card has multiple benefits, its reckless usage can have many negative consequences as well. It could affect your credit score, and increase debt. Therefore, always be mindful of how and where you use your credit card. Here are 3 mistakes to avoid when using a credit card:

  1. Only spend up to 30% of your credit limit: Say, your credit limit is Rs 50000 and you spend Rs 40000 per month from your credit card. The spending in this case equates to 80% of the credit limit. The higher the credit limit usage, the lower your CIBIL score is. CIBIL score is a 3-digit number that sums up your credit history and repayment data. A good CIBIL score comes in handy when you apply for a loan. It is a parameter to assess your creditworthiness. If you do want to spend more on your credit card, increase the credit limit to ensure a healthy credit utilization ratio. 
  2. Do not withdraw cash from your credit card: While withdrawing cash from a credit card might seem like the easy thing to do, it is not. For every cash withdrawal via a credit card, you will be charged 2.5 % to 3.5% interest rate depending on the bank. This equates to approximately 40% interest rate per annum! Additionally, the credit card company will charge a late payment fee if you are unable to pay the withdrawn cash before the due date. 
  3. Avoid making minimum payment: When you receive a credit card bill, you can make the payment in two different ways. One, pay the total amount or a specific amount depending on the budget you have for the month; two, pay the minimum amount. While paying the minimum amount may seem like the right thing to do in the short term, you should ideally avoid it. Why? When you pay the minimum amount only which is equal to 5% of the total amount due, you are unknowingly paying an interest rate of 40% per annum!

So, there you have it! The next time when you spend money from your credit card, follow these rules and you’ll be golden!

For any clarifications/feedback on the topic, please contact the writer at sujaini.biswas@clear.in

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