Credit cards are one of the most popular types of lending products. Whether to pay for fuel or purchase trendy gadgets, shop for luxury apparel, or upgrade their home, millennials enjoy swiping their credit cards. Customers' spending habits have shifted over time as credit cards have become more easily accessible. But if you do not want to find yourself in a situation where you spend now and then regret it later, you must follow these tips on how to use a credit card effectively.
What is a credit card?
A credit card is a rectangular-shaped plastic card that financial institutions issue to consumers depending on their eligibility. This card issues a pre-defined amount to the consumer, allowing them to use the fund as and when desired. Credit card users often swipe this plastic card to buy goods and services.
The credit card limit depends on your credit history, occupation, and monthly income. When you use funds from this card, you must repay them within the time frame specified, along with any applicable interest rate or other charges you agreed to when you applied for the credit card.
What are the features and benefits of a credit card?
You can enjoy the following benefits if you know how to use a credit card smartly.
- Credit cards, just like most loan products, have flexible repayment terms ranging from 3-36 months.
- During a cash emergency, you can get a loan against your card.
- During a financial crisis, the card allows you to withdraw cash from an ATM.
- The lender may offer you a customised card if you have a good credit history and a low debt-to-income ratio.
- Most credit cards offer interest-free borrowing if the funds are repaid within a specific time frame, usually 45-50 days.
- Several credit cards provide complimentary personal accident coverage, which pays for your medical treatment or a lump sum payment to your family (during death/disability) caused by an accident.
How to use a credit card effectively?
If you do not use your credit card wisely, it can lead you to a debt trap. Here are the most vital tips you should start implementing if you rely heavily on these cards to meet your expenses.
Request for a higher credit limit
The credit card limit varies depending on the borrower. If you use your credit card frequently, ask your lender for a higher limit. The reason for this is straightforward: if the limit is higher, you can keep your spending limit within 30% of your available credit.
Assume you use around Rs 35,000 monthly from your credit card, and your card limit is Rs 100,000. In this case, your credit score will suffer because you have used more than 30% of your credit limit. However, if your lender approves you for a card with a limit of Rs 2,00,000, you can easily spend up to Rs 60,000 without negatively impacting your credit score.
Understand the reward benefits
Credit cards provide reward points for specific purchases. For example, if you refuel your vehicle at a specific gas station, you will earn rewards. Similarly, when you apply for a card, the lender may offer you guaranteed gift vouchers or other perks.
These advantages could include a discount on movie tickets, free access to airport premium lounges, and loyalty points for shopping. It is critical to understand these benefits before using the cards and then use them properly to get the most out of your card.
Be timely on bill payment
Skipping payments on your credit card bills will not just harm your credit score but force you to pay a high-interest rate. Most credit cards offer a zero-interest period of 30 days to 45 days. Being late on your credit card bill payments will result in penalty charges. The Reserve Bank of India (RBI) has directed financial institutions to charge a late fee only if the payment has been due for more than three days after the due date.
Avoid paying the minimum amount
Never assume that paying a portion of your credit card bill will save you money. Even if the lender allows for minimum payments, the situation will still result in a deterioration of your credit history. Also, not clearing your dues at the earliest will result in higher interest pay-outs. That means you will end up paying much more than the value you borrowed.
Also Read: How to clear credit card debt with a personal loan?
Avoid credit card usage at ATMs
As previously mentioned, a credit card allows you to withdraw cash from the ATM. The feature may appear appealing, but it comes at a high cost. If you want to withdraw Rs 500 using your credit card and the lender charges you Rs 30-50 in transaction fees, tell us if this is a wise move. Certainly not.
Never reveal your personal information
Credit card fraud is becoming more prevalent these days. You should be aware of the scenarios in which you may be defrauded by scammers while using your credit card. Some ideas for preventing credit card fraud include:
- Never share card information such as the CVV number, expiry date, security pin, or OTP.
- Change your security pin regularly.
- Avoid swiping your credit card everywhere. Use it only if you are confident that the POS machine is genuine and will not clone your card information.
Check associated fees
You don't get a credit card for free. The lender levies a variety of fees. Renewal fees, joining fees, and a few others are among them. However, many lenders have a provision that states that if you use the card, the annual fees will be waived. As such, when applying for this card, carefully review the associated fees.
Look out for alternative
A credit card has several disadvantages. Some of them include a high-interest rate and a decrease in creditworthiness for exceeding 30% of the available limit. Furthermore, credit cards are not suitable for large-ticket purchases. So, what are the alternatives? You should try obtaining a personal loan.
Personal loans are available for up to Rs 5,00,000 with a flexible repayment period of 60 months. Furthermore, you can use the funds for both business and personal purposes. Meeting wedding expenses, debt consolidation, business expansion, and vehicle purchases are some of the common reasons why people apply for this loan.
Go through your bills
Credit cards can come in handy when dealing with a financial crisis. However, if you use your card excessively without a solid repayment plan, you will struggle to pay off your debts. The situation will force you to pay a high-interest rate on your outstanding debts.
Also Read: Personal Loan or Credit Card Which one would you go for
To conclude
Using credit cards can either increase or decrease your credit score, depending on your spending habits and repayment behavior. If you frequently use a credit card, ask your lender for a higher limit. Examine the various provisions associated with your card, such as different charges, reward benefits, and so on. Also, avoid keeping multiple cards.
