Credit Cards are, for sure, one of this century's best inventions! The idea of credit is not new to our society, but encapsulating it into a plastic card must receive genuine praise.

Most individuals with any kind of income hold a credit card. Whether it is a basic silver card or the prestigious platinum card, everyone owns one. Credit cards serve as a backup in times of dire financial troubles. If you are prudent in your credit card usage, it will be one of the best financial management tools in your life. 

Credit Card Usage By Common Man

Many credit cardholders use it for all their monthly expenses, earning high reward points or cashback and repaying the entire amount in the next billing cycle, reaping the maximum benefits out of a credit card. This can be deemed the best usage of a credit card. 

Some people seldom use their credit cards or use them only for large transactions and hence, do not pay on time. They also incur interest charges and late payment fees. These customers land up not following up with the rewards program or cashback offers, thus not optimally utilising their credit cards. Which, in turn, does not benefit them in all.  

Below, we have enlisted the most common mistakes that credit card holders make, resulting in incorrect usage of their credit cards!

1. Over Usage Or Under Usage Of Your Credit Card Limit

Credit card limits are based on your monthly income. It is usually about twice or thrice the limit of your monthly income. However, experts prescribe that your credit utilisation ratio should not exceed 30% of the credit card limit. Using your credit card within this limit ensures that you are able to pay the bills comfortably, not leaving any unpaid balance. The debate on the appropriate credit utilisation ratio is an ongoing one. While some experts opine that 30% is a reasonable one, some experts feel that up to 50% should be allowed, considering all monthly expenses being taken care of through credit cards. The point in focus is that you should be able to repay your credit card bill fully and comfortably, without carrying forward any balance to the next billing cycle. 

Another issue with credit card limits is under usage - credit cards reward you for using them. You get merchant discounts, cashback and other offers when you use your credit card. Given that we shop on a myriad of different websites and apps, be sure to check the offers given by them for your particular credit card. These offers differ based on the type of credit card you use or the kind of product or service you are purchasing. Shop around a bit to find the best deals before you make the final purchase. 

2. Repaying Only The Minimum Amount Due On A Regular Basis

This is in congruence with the previous point about over usage of your credit card. When the bill amount is huge and you can’t afford to repay it, you would go ahead with just the minimum amount due. This may reduce the interest charges, but will pile up the debt and lead you to a debt trap, if left unchecked. Be very conscious of your total credit limit and how much outstanding you have on the card before you make the next purchase. Try and repay the entire bill amount. Make an honest effort to reduce your credit card usage to match your income. 

3. Not Upgrading Your Credit Card Regularly

The initial credit limit and benefits offered on your credit card are not fixed. This can be enhanced from time to time based on your latest income and your credit card usage pattern. The credit card company sends you periodical offers to increase your credit limit or the type of credit card, based on your repayment history and credit card usage. Utilize these offers and upgrade your credit card. This will get you increased credit limits and other card usage benefits for your advantage. 

4. Withdrawing Cash At ATMs Using Your Credit Card

This could be considered a blunder that should be avoided at all costs. Yes, credit cards allow you to withdraw cash at ATMs, but it comes with high cash withdrawal charges and interest rates. Cash withdrawals made with credit cards attract money withdrawal fees of up to 3.5% of the withdrawal amount. Furthermore, card companies charge fees of up to % p.a. from the date of withdrawal to the date of repayment. You should not withdraw cash using your credit card unless it is an absolute emergency. 

5. Not Utilizing Your Credit Card Reward Points Optimally

Reward programs are how credit card companies reward you for using them. Most credit cards reward you with 1 point for every Rs.100 spent. This 1 reward point translates into Re.1. These reward points can be used in many ways; to buy merchandise from a catalog, to adjust the points against your bill amount, to buy fuel, air miles are a very common reward too. The thing with reward points is that they expire after about 2 to 3 years of accumulation. So you have to constantly keep a track of the accumulated points and redeem them at the right time to get the maximum benefits. Do not let them expire. 

Credit cards not only offer a plethora of benefits to the customers, but can also give problems to them, if financial planning is not done well. Credit cards used incorrectly can turn into a burden, lowering your credit score and putting you in serious debt.

FAQs for warning signs of incorrect credit card usage

  1. Will I be charged interest charges even if I make the minimum amount due on my credit card bill?

Yes, paying the minimum amount due will rescue you from late payment charges but you will still be charged interest on the outstanding amount. 

  1. How many days of interest free period will I get for cash withdrawals at an ATM using my credit card?

Actually, you don’t get any interest free period for cash withdrawals using your credit card. You are charged interest from day 1 for cash withdrawals, until the day or repayment. 

  1. What is considered an ideal credit utilization ratio?

While some experts believe that % is a reasonable amount, others believe that up to 50% should be allowed, given that all monthly expenses are paid with credit cards. The main point is that you should be able to repay your credit card bill completely and comfortably, without carrying any balance forward to the next billing cycle.

  1. What other charges will the credit card company levy if the total outstanding is not paid?

There are usually interest charges. If you don’t pay it before the due date, there will also be late payment charges along with GST. 

  1. What is the average annual interest rate charged on credit cards?

Credit cards charge anywhere between 48 – 60% interest charge.