A Credit Card is a tool which helps its user in carrying out instant cash transactions on a credit basis. It is based on the promise of the cardholder to pay the entire amount spent through the Credit Card at the end of the billing cycle to the issuer of the Credit Card, or with additional charges post the bill date.
A Credit Card is quite different from a Debit Card wherein your expenses are directly linked to the balance in your account. Instead, a Credit Card works on the concept of Credit, just like a postpaid mobile plan, whereas, a debit card uses the money in the bank account immediately for the payment. Usually, all banks issue Credit Cards to the people who have a stable stream of income and are earning more than the minimum income specified by the bank.
Owing to convenient it offers, cards are popular among people of all age groups. But these should be used carefully. The use of cards should not be unmindful, or you may end up paying much more on its bill than what you spend.
Well, the penalty levied for defaulting on monthly payments could be as high as 36% p.a. on the outstanding amount.
So, let’s discuss what are the do’s and don’ts to use Credit Cards. You must know how to utilize your card in the best possible way before you choose the best Credit Cards such as HDFC or SBI Credit Cards.
DO’s of Using a Credit Card:
Make payments on time: Paying your card bills on time is crucial. Spend according to your needs instead of wants. That way, you don't have to pay interest on the balance amount. A bank analyses your repayment history before providing you with a loan and sets the interest rate accordingly. Impressive repayment history can help you get loans at lower interest rates.
Claim Benefits: Generally, a Credit Card with an annual fee comes with benefits. Avail these benefits to your advantage in order to optimize your Credit Card. Different cards have different benefits. These can include access to the Airport Lounge, or Reward Points on every transaction which can later be redeemed for specific gifts. It is advisable to go through the benefits before selecting a card. In case you've just stepped out into the corporate world, it is better to go with a free card, i.e., a card without a fee.
Finding the Right Credit Card: There are many different kinds of Credit Cards available in the market. They vary in benefits, price, and most importantly, the annual fee. What is also important is the credit limit of the card and the interest rate on it. Choose a card with a low credit limit if you're not a heavy spender. Pick just the one that suits you the most.
Avoid having more than one Card: It is suggested not to have more than a couple of Credit Cards. This is because having multiple cards will probably contribute to unplanned and irresponsible spending. Using a Credit Card means that you're going to pay out of your pocket later. Thus, if you don't want to pay a large amount at the end of the month, be sure not to have multiple Credit Cards. This, however, depends on your income level. If your income is good enough, you may have multiple cards. Credit Card bills should not put you in trouble at the end of the billing cycle.
DON’Ts of Using a Credit Card:
Don’t ruin your credit score: If you're paying your credit card bill after the due date, you are sure to get a late payment penalty. This penalty has an interest rate applied to the balance amount, which is very high. Paying the late payment fee can be stressful, being very costly. This will also negatively affect your Credit Score.
Don’t withdraw cash using Credit Card: Credit Card Loan or Cash advance from ATMs can be very costly. This is because there is always a fixed one-time fee applicable when you withdraw cash, irrespective of the amount. Another thing to be kept in mind is that there is a very high interest rate applicable on the amount withdrawn, which is included in the monthly bill.
Don't max out the limit: If you're regularly maxing out your Credit Card limit and exceeding the sanctioned limit, it is seen as a cash hungry attitude by the banks. This also results in a late payment penalty, which is very high interest on the amount you're unable to pay. Your credit score will also come down. It is advised to spend only up to 30% of Credit Card limit.
Don't use Credit Card for daily expenses: Using it for everyday expenses may result in uncontrolled spending, as daily expenses are a major part of the monthly expenditure. Moreover, if, at the end of the month you are unable to pay the bill, you'll have to pay the penalty.