Usually we don’t realise, but credit
cards can be extremely dangerous to our financial health. Therefore, as the use
of credit cards proliferate, it is important for everyone to be aware of the
pitfalls and avoid them as far as possible. This is in our best interest.
While a credit card is a nice tool
of financial convenience, its’ improper selection and usage can cause some
serious financial damage.
Here is a list of some common
blunders people usually make with their credit cards. We must make sure not to repeat
them and regret about it later.
A. Not looking around for the best cards
We generally do not do any
comparative analysis of the various cards available in the market. Whenever any
bank sends its’ sales representative, we quite often apply for the same. We
don’t bother to check the fee structure, the interest rates, the ‘real’
benefits it can offer to us or any other terms & conditions.
There is wide difference between
various credit cards in terms of the initial fees, annual charges and the
interest rates. This, especially the interest charges, can make a substantial
cost saving if we choose our card carefully.
B. Not considering the need for the card
Usually 1 or 2 cards are more
than sufficient. But many of us tend to collect cards. It is seen as a status
symbol if you are carrying say 5-6 credit cards in your wallet, especially the
so-called Gold or Platinum Cards. But this is a false pride. Is it worth paying
thousands of rupees in annual charges for something which you don’t really need?
Also, if you have multiple cards,
it is quite likely that you could miss some payments as it is difficult to keep
track of so many bills – month after month. This is assuming that you have
sufficient money to pay-off all the bills. Often, multiple cards also increase
the tendency to overspend. This means you won’t have sufficient cash to pay
your bills on time. Using the card is quite simple, but when it comes to
payment it can get pretty serious.
C. Not paying the bills on the due date
This is the recipe for DISASTER. The
interest rates on credit cards are EXORBITANT ranging anywhere from 2-4% per
month i.e. about 24-48% per annum. By no stretch of imagination is this cost
worth paying for.
Credit cards don’t charge you
anything if you are paying ALL your due amounts on the due date. But the day
you default even a small amount and carry forward some of your balance, you
a)
not only start paying the exorbitant interest charges
b)
but also lose the benefit of the interest-free period
on all outstanding and future purchases
c)
and also become to liable to pay 12.36% service tax on
the interest amount, which increases your overall interest cost to 27-54%.
Therefore, make very very sure
that you don’t carry forward any outstanding balance; ever. Paying the ‘minimum
amount’ may sound very good and convenient, but is a catastrophe in reality.
D. Using your credit card as an ATM card
While buying something on the credit
card, you still have time till the due date to pay-off without any interest charges.
This is no so when you withdraw cash with your credit card. Here your interest
meter starts from that very day. And, apart from the interest charges, a fixed
fee is also usually charged per transaction.
Therefore, don’t ever use your
credit card at an ATM to withdraw cash, unless it is a STRICT EMERGENCY and you
have exhausted all other options.
E. Not reading the fine print in the offers
“Conditions Apply” should always
the first thing you must read in any offer. This is where most people get into
a problem. All offers like cash-back, free miles, bonus points, discounts, etc.
will have some conditions.
Besides, if anything sounds too
good to be true, you must double check the terms of the offer. Credit card
companies are not a charity organisation; they are a proper business. And no
business would like to give away anything free or cheap, where it loses money. So
the onus is on you to see whether you are eligible for the offer and, more
importantly, does it really benefit you.
F. Going over the limit
Each credit card specifies a
certain limit upto which you can run-up your balance. Thereafter, even if the bank
allows you to exceed the limit temporarily, you may be liable to pay over-limit
charges.
Many people are not aware of
this. They assume that once they have been permitted to exceed the limit there will
be no additional charges. So you need to double-check this point for your card.
G. Using your credit card overseas
Surely a credit card is very
convenient when you are traveling abroad. But it comes with a sort of hidden cost
i.e. exchange rate. Given the exchange rates that are generally charged for
overseas transactions on a credit card, it will usually work out cheaper to
carry the travellers’ cheques/prepaid forex cards.
Also, a stolen credit card is
relatively easier to use than stolen travellers’ cheques. Besides, the
travellers’ cheques/prepaid cards are for a fixed amount, but a credit card
could be used upto your credit limits. So from safety point of view also,
credit cards should be avoided when going abroad.
These common mistakes have cost
others’ very dearly, even to the point of financial ruin. It therefore makes
ample sense for us to learn from their experience and save ourselves from all
the potential loss and trouble.