Omozing Credit Cards

7 Credit Card Sins

Table of Contents

Credit card usage in India has increased exponentially in the past couple of years. According to RBI, there were over 4.1 crore active credit card accounts in India in August 2018, compared to just over 2.7 crore cards in October 2016. Here are the seven sins that credit card users should avoid at all cost.

1. Cash Withdrawal

Credit cards allow users to withdraw cash from ATMs at a very high cost. There is a fixed charge for any cash advance. Unlike purchases at merchant establishments, the interest rate meter on cash withdrawals starts from the first day. During international travel, foreign exchange cash withdrawals could attract an additional transaction fee.

Besides cash withdrawal charge is also levied. The cash withdrawal charge typically is around Rs 262 or 2.8 per cent of the amount withdrawn, whichever is higher. So let’s say an amount of Rs 25,000 is withdrawn using a credit card. So, 2.8 per cent of the amount works out to be Rs 700. Now Rs 700 as we can see is higher than Rs 262, and hence that is the amount that will have to be paid as a cash withdrawal charge.

Interest on cash withdrawn typically varies from 2.7 to 2.85 per cent per month. And since this interest is compounded monthly, the effective annual rate of interest tends to be anywhere from 38 to 40 per cent per annum.

2. Ignoring your Credit Reports

It’s easy to assume that your credit report is very good. However, all it takes is one bad move on your part or some shady activity by a fraudster who has stolen your identity to lower your credit score.

Your credit report also may contain errors. Common mistakes on credit reports include errors in a consumer’s identity, incorrect reporting of an account’s status, and mistakes in data management, according to the Consumer Financial Protection Bureau.

Credit scores are generally based on the information in credit reports, having mistakes in your credit reports can cost you money. You might pay higher interest rates on loans, or be restricted to smaller lines of credit.

3. Failing to pay on time

Credit card companies don’t like customers who miss payments. They send reminders by mail and SMS, telling you when payment is due. Do not ignore these alerts. Missing a payment attracts penalty as well as interest on outstandings. What is more, purchases made in the following month do not get interest-free credit. The biggest loss is a blemished credit history and lower credit score, which adversely impacts your chances of availing any credit facility in the future.

4. Exceeding your Credit Limit

A credit card gives the user the freedom to spend. Goods and services that once appeared beyond one’s reach becomes available with the swipe of a card. However, if you use up a large portion of the available credit limit, your credit score gets hit. But exceeding your credit limit can cost you even more if you authorize your credit card company to approve over-limit charges. High credit usage portrays the user as credit hungry with a potentially higher chance of default. This adversely affects your credit score and may make it difficult for you to access additional credit facilities.

5. Applying for too many Credit Cards

Applying for a credit card generally results in the lender making what is known as a “hard” inquiry into your credit. Hard inquiries are noted on your credit reports, and having too many can lower your credit score. Filing too many applications for credit cards signals desperation to lenders. This can be especially frustrating if you are trying to build a good credit score. One way to establish credit is by getting a credit card and using it responsibly.

6. Spending to Earn Rewards

Credit Card companies encourage you to spend more by offering reward points on expenditure. While it sounds attractive, don’t spend only to earn points. Also, don’t wait too long to accumulate points. The reward points lose value over time like money. If 10,000 points can fetch an item today, two years later the same item may need 13,000 points.

7. Closing all your Credit Card accounts

Closing a credit card account even if you are doing this because you’re not using the cards could negatively affect your credit score. That is because closing an account affects your credit utilization ratio. Additionally, closing an account doesn’t make it disappear. You’re still liable for any outstanding balance, and closed accounts can remain on your credit reports for years. Exactly how long a closed account remains on your reports depend on the payment history of the account.

For example, if you have two cards with a credit limit of Rs 50,000 each and you spend Rs 30,000 a month, your credit utilisation ratio is 30%. If you close one card, your credit utilisation ratio jumps to 60%. A higher credit utilisation ratio hurts your credit score, thus making it difficult to avail loans in future.