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Credit Card – Use Wisely


By Ravi Garg

At present, most of the people are using credit cards instead of debit cards to make payments for their purchases. They are doing it because of exciting rewards as well as interest free periods on offer. Credit cards let you borrow money from a bank under the agreement that you will repay it on or before due date or incur interest charges. Have you ever done any analysis before making payment via credit card? There are some points which should be kept in mind before using a credit card.
1. Spending Future Income
Since the credit cards are offering interest free period people don’t think that they are spending future income which is not yet generated. They don’t consider what if an extraordinary expense arises in future. This is a universal truth, we can predict our income but we cannot predict our expenses or losses accurately.

2. One mistake can cause heavy financial damage
If the payment of credit card is not done on the due date, then credit card companies charge heavy interest on the default by the borrower. Late fee is also charged for late payment of credit card bills and it will get added in the next credit card bill.
Once the default has occurred, the CIBIL score of the credit card holder also gets reduced due to late payment. This will lead to difficulty for a credit card holder in taking any type of loans in future as it will get flagged in his CIBIL report which will be visible to all the financial institutions before processing of the loan.
3. Debt Trap
Credit cards can help a person by providing an interest free period. It is providing a lifeline in case of cash flow problems but they are pure temptation which can lead you into a debt trap. A person who is spending in cash always knows how much money remains in the pocket. Some amount is saved for the future as well. But whenever you spend on credit and have a feeling that you have an interest free period, you are tempted to spend on things which are not even required. This eventually leads one into a debt trap which is never going to end.

4. Total Amount Due V/s Minimum Amount Due
There is an option provided by the Credit Card companies wherein you can pay your minimum amount due instead of total outstanding of your credit card.
Total Amount due is sum total of all the purchases made by you during the period plus opening balance if any.
Minimum amount due is a small portion of total amount due which is required to be paid to maintain your credit card. Once you have paid the minimum amount due, it ensures that you are able to repay the balance portion of the credit card outstanding.
But, the thing which should be kept in mind is, you are still required to pay the interest on balance outstanding of the credit card. It still reduces the CIBIL score and affects your credit worthiness. Minimum amount is paid just to maintain your card with the bank.

5. Avoid utilising more than 30% of credit limit
6. Credit Utilisation is a major factor in your credit score. Your utilised credit limit shows your credit hungriness. A credit expert says, “The 30% level is not a target, but rather a maximum limit. Exceeding that level will have significantly negative impact on the credit score. The lower a person’s utilisation rate, the better from a scoring standpoint.”
A credit card holder should keep the above things in mind before swiping the credit card otherwise it may create a huge problem in the future.
Spend Wisely!

(Ravi Garg is an associate Chartered Accountant, who has completed his CA at just the age of 21 years).