5 Common Credit Card Mistakes to Avoid
5paisa Research Team
Last Updated: 13 Feb, 2024 11:37 AM IST
Want to start your Investment Journey?
Content
- 1. Choosing the Wrong Credit Card for Your Needs
- 2. Missing Payments of Credit Card Bills
- 3. Making Only Minimum Payments
- 4. Taking Cash Advances and Spending on Unnecessary Things
- 5. Overspending Using Your Credit Card
- Conclusion
Using credit cards unwisely can have lasting repercussions on your money situation. From choosing the wrong card to failing to pay on time, even minor mistakes can lead to hefty interest charges and debt buildup. But you can steer clear of these pitfalls with some discipline and know-how.
Read on to uncover the five most common credit card pitfalls people face and how to avoid them. By adopting some better practices, you can reap the rewards of credit cards without falling into any expensive traps.
1. Choosing the Wrong Credit Card for Your Needs
Selecting the most appropriate credit card from many options can be daunting, given the diverse range of fees, interest rates, and rewards offered by each. Selecting a card that could be more optimal may result in missed opportunities for lucrative rewards or paying excessive interest charges. Therefore, careful consideration is imperative to ensure that the selected credit card aligns with one's financial goals while balancing costs and benefits.
Consider your budget, spending habits, credit score, and money goals when applying for a new card. A rewards card only makes sense if you can pay off the balance every month. If you carry debt month-to-month, look for cards with 0% intro APRs on purchases and balance transfers. Read the fine print, too – a killer signup bonus may have some strings attached. Take your time and find a card that fits your lifestyle.
2. Missing Payments of Credit Card Bills
Late payments on your credit card can have serious consequences for your finances, such as penalties and a negative impact on your credit score. To avoid this, you can set up automatic payments and add payment due dates to your calendar with reminders to ensure you pay on time. Being proactive and taking these steps can help you avoid any neglect and maintain a healthy credit profile.
If you encounter an unexpected expense and miss a payment on your credit card, it's important to inform your card company immediately. They may be willing to waive the fee, particularly if it's your first time doing so. If you're unable to afford the minimum payments on your credit card, consider reaching out to a credit counselling service for assistance. Late payments can negatively impact your credit score, so it's crucial to pay your credit card bills on time.
3. Making Only Minimum Payments
It may be pleasing to settle for the minimum monthly payment, especially if you have a large balance. However, this can be a costly mistake. Most of your payment will likely go towards paying interest fees, leaving only a small portion to reduce the principal amount. As a result, you'll prolong your debt repayment and pay more in total interest. To avoid this, paying more than the minimum amount whenever possible is best.
If you have a balance of less than Rs 1,00,000, it is recommended that you make fixed payments that are large enough to pay off your debt within a year. However, if you owe a larger amount, you can set up a payment plan where you pay a fixed amount that covers both the interest and principal until you become debt-free. To save money, it is advisable to pay more than the minimum payment whenever it is possible. Hence, it will help reduce the high-rate balances more quickly.
4. Taking Cash Advances and Spending on Unnecessary Things
While it may seem convenient to turn to credit card cash advances during a financial emergency, the high fees and interest rates that come with them make them an unwise choice. Interest rates on cash advances are typically much higher than those for regular purchases.
In addition to that, cash advance fees are charged either as a flat rate or as a percentage of the withdrawal amount. It's best to avoid relying on credit card cash advances and explore alternative options instead.
When you make a cash advance, unlike regular purchases, you do not get an interest-free grace period, as this means that you start accruing interest immediately. As a result, the additional costs quickly add up, and small cash withdrawals can turn into large balances that become difficult to repay. Therefore, it is better to use this expensive feature only for absolute necessities.
5. Overspending Using Your Credit Card
Using a credit card to make purchases can be tempting, especially with easy tap-and-go payment methods that don't require signing or entering a PIN. However, giving in to impulsive purchases and unnecessary spending can make paying off your credit card balance more difficult, leading to increasing debt and interest fees.
To avoid excessive credit spending, establishing a budget and remaining committed to it is advisable. Consistently monitoring credit card statements can aid in detecting extra charges on time. While it may be tempting to utilise credit for all expenses, it is recommended that cash or debit be used for more flexible expenditures, with credit reserved solely for planned, essential purchases. By adopting an awareness of credit card spending habits, it is possible to prevent balances from escalating and causing financial strain.
Conclusion
Mishandling credit cards jeopardises your financial health. While rewarding when managed prudently, common mistakes can trap you in endless debt. Choosing suitable cards, paying responsibly, avoiding cash advances, and controlling spending prevent credit card pitfalls. Use your cards judiciously as financial tools, not expensive liabilities. Employ smart strategies and reap the advantages credit cards offer without the added baggage debt brings. Your future self will thank you.
More About Generic
- What is a Virtual Payment Address (VPA) in UPI?
- Best Swing Trading Strategies
- What Is FD Laddering?
- What Credit Score is Needed to Buy a House?
- How to Deal with Job Loss?
- Is 750 a good credit score?
- Is 700 a Good Credit Score?
- What is Impulse Buying?
- Fico Score vs Credit Score
- How to remove late payments from your credit report?
- How to Read Your Credit Card Statement?
- Does Paying Car Insurance Build Credit?
- Cashback vs Reward Points
- 5 Common Credit Card Mistakes to Avoid
- Why Did My Credit Score Drop?
- How to Read a CIBIL Report
- How Long Does It Take to Improve Credit Score?
- Days Past Due (DPD) in CIBIL Report
- CIBIL Vs Experian Vs Equifax Vs Highmark Credit Score
- 11 Common Myths about CIBIL Score
- Tactical Asset Allocation
- What is a Certified Financial Advisor?
- What is Wealth Management?
- Capital Fund
- Reserve Fund
- Market Sentiment
- Endowment Fund
- Contingency Fund
- Registrar of Companies (RoC)
- Inventory Turnover Ratio
- Floating Rate Notes
- Base rate
- Asset-Backed Securities
- Acid-test Ratio
- Participating Preference Shares
- What is Expenses Tracking?
- What is Debt Consolidation?
- Difference Between NRE & NRO
- Credit Review
- Passive Investing
- How To Get Paperless Loans?
- How To Check CIBIL Defaulter List?
- Credit Score Vs CIBIL Score
- National Bank for Agriculture and Rural Development (NABARD)
- Statutory Liquidity Ratio (SLR)
- Cash Management Bill (CMB)
- Secured Overnight Financing Rate (SOFR)
- Personal Loan Vs Business Loan
- Personal Finance
- What is Credit Market?
- Trailing Stop Loss
- Gross NPA vs Net NPA
- Bank Rate vs Repo Rate
- Operating Margin
- Gearing Ratio
- G Secs - Government Securities in India
- Per Capita Income India
- What is Term Deposit
- Receivables Turnover Ratio
- Debtors Turnover Ratio
- Takeover
- IMPS Full Form in Banking
- Redemption of Debentures
- Rule of 72
- Institutional Investor
- Capital Expenditure and Revenue Expenditure
- What is Net Income
- Assets and Liabilities
- Gross Domestic Product (GDP)
- Non-Convertible Debentures
- Cost Inflation Index
- What Is Book Value?
- What Are High Net Worth Individuals?
- Types of Fixed Deposits
- What Is Net Profit?
- What is Neo Banking?
- Financial Shenanigans
- China Plus One Strategy
- What is Bank Compliance?
- What Is Gross Margin?
- What Is an Underwriter?
- What is Yield To Maturity (YTM)?
- What is Inflation?
- Types of Risk
- What Is the Difference Between Gross Profit and Net Profit?
- What is a Commercial Paper?
- NRE Account
- NRO Account
- Recurring Deposit (RD)
- What is Fair Market Value?
- What Is Fair Value?
- What is NRI?
- The CIBIL Score Explained
- Net Working Capital
- ROI - Return on Investment
- What Causes Inflation?
- What is Corporate Action?
- What is SEBI?
- Fund Flow Statement
- Interest Coverage Ratio
- Tangible Assets Vs. Intangible Assets
- Current Liabilities
- Current Ratio Explained - Examples, Analysis, and Calculations
- Restricted Stock Units (RSU)
- Liquidity Ratio
- Treasury Bills
- Capital Expenditure
- Non-Performing Assets (NPA)
- What is a UPI ID? Read More
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.
Frequently Asked Questions
Five tips for effective credit card use are
1) Pay your balance in full each month,
2) Choose a card aligned with your spending habits,
3) Keep credit utilisation below 30%,
4) Set a budget for credit spending,
5) Review statements regularly for errors or fraudulent transactions.
Yes, credit card companies can make account errors, leading to incorrect interest charges, late fees, or fraudulent transactions. Always verify new charges and thoroughly review statements monthly. Report any discrepancies immediately to rectify mistakes.
Contact your bank and credit card company when you realise the error. For small discrepancies like Rs.10,000, your bank may make an automatic adjustment. You'll have to initiate a payment trace for larger mistakes, providing information to help identify the errant transaction. This process can take up to 90 days for resolution. Set up alerts and confirm payment details to avoid sending future payments to the wrong account.