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Caution While using Credit Cards

A credit card means you buy now and pay later. Your bank (issuer of the credit card) pays the amount for the product or a service right away and has to be repaid within a period of time. This card is very useful if you have to purchase a product immediately and have no ready cash. Nevertheless one needs to be careful while using a Credit Card.

Caution while using credit cards

Never overspend using a credit card
A credit card means buying now and paying back later. You tend to overspend (blow up cash) as money is paid back at a later date and you lose track of spending.

Use the card for a need not a want
The common tendency is to use a credit card for almost every purchase. Use the card wisely only for emergencies (medical or otherwise) and not for any whim and fancy.

Make a note of the billing cycle
A billing cycle normally consists of 30 days within which all purchases and repayments are accounted for and billed. An additional 25 days may be added to the billing cycle which constitutes the grace period. If you repay the total outstanding amount basically amount due on the credit card within this time period (billing cycle) no interest is charged on the borrowed amounts. So keep it simple. Never spend more than you can repay in the billing cycle and you will have a credit card where you purchase without having to pay an interest.

Know your credit limit
The bank sets a credit limit which is a maximum amount you can spend using the card. This depends on your salary .It could also depend on the number of other loans you have availed and are currently servicing.(Repaying the EMI’s).

You need to set a credit limit level (say 50%) above which you will not go resulting in a comfortable repayment. If you exceed the credit limit there is a fee you will be charged which varies from bank to bank.

Why does having too many credit cards affect your credit score?
Banks set a credit limit based on your salary and certain other factors. Higher the salary more is the credit you can avail. In order to escape from this problem and get a higher credit limit you may resort to availing credit cards from more than one bank. CIBIL deems this to be risky and assigns a lower score if too many credit cards are availed. Your credit score is maintained with CIBIL (Credit information Bureau of India Limited) called CIBIL TransUnion Score on a scale of 300-900. An ideal score is around 750.

Never miss your payments
What happens if you cannot pay back the borrowed amounts within a billing cycle? Banks decide a certain minimum amount which needs to be paid within the billing cycle. If this minimum amount is not paid a penalty is charged which could be as high as 5% of the outstanding amount on the credit card.

If you fall back on payments regularly or default (do not pay back the remaining amount) on the credit card your credit score is severely impacted and you will be denied any future loans.

High interest rates
You have to pay a very high interest rate if the credit card dues are not settled within the billing cycle. Interest rates inclusive of service charges can be as high as 30-40% per annum on the amounts due.

Check for hidden charges
You need to read the terms and conditions before taking up a credit card. Banks charge a processing fee to cover their administration and other costs. This is a non refundable charge and you have to bear it even if your credit card application is rejected. Banks also charge handling fees. A severe penalty is charged for frequent delay in repayment which might cause you to default as you find the expense too high to bear and this affects your CIBIL score.

Can I use my credit card to withdraw cash from an ATM?
Yes, you can use the credit card to make withdrawals from an ATM. If you do so interest is charged which might range from 3 % per month as well as a transaction fee as high as 2-3% of the amount withdrawn. There is no interest free period (billing cycle) or a grace period. You have to pay interest as well as the transaction fee as soon as you withdraw the amounts.

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