Here Are 10 Common Credit Card Mistakes You Should Avoid

November 30, 2021 Mutual Fund

A credit card is a widely preferred payment method by salaried individuals as well as business people for buying anything from as basic as groceries and medicines to luxurious items such as smartphones and air conditioners. As credit cards function on a deferred payment basis, it increases the purchasing power of cardholders by opening a new line of credit for them. In addition, if you cultivate better credit card habits, a credit card can help you improve your credit score, build a credit history, earn rewards, and help during emergencies. Unfortunately, people make some common mistakes when using their credit cards and eventually get trapped in debts, thus leading to financial stress. Here are the 10 common credit card mistakes that you could make and what you need to do in order to avoid them:

1. Not Knowing the Terms And Conditions:

There could be some hidden terms and conditions or charges that are mentioned in fine print in the credit card brochure and on the website. Moreover, even the salesperson might not be transparent about some of the terms and charges related to the credit card, to achieve his sales target. There were many instances when cardholders were told that the credit card is free for a lifetime, but the company starts charging an annual fee after a year or two. When a cardholder complains about it to the customer care, they are told that there is a minimum spending requirement to get the benefit of an annual fee waiver. Furthermore, people generally ignore some charges like annual fee, late payment fee, rate of interest, forex fee, cash withdrawal charges, etc. that could make a huge difference once you start using the card.

How to avoid it – To avoid such situations, make sure you carefully read all the terms and conditions, product features, charge sheets, etc. The time invested in research and reading the fine print is worth avoiding unpleasant surprises in the future.

2. Overspending:

You tend to spend more than your budget when you use a credit card for purchases as the money actually doesn’t go from your pocket at the time of purchasing. The ease and convenience of using a credit card have increased more with online shopping habits. People shop online with their credit cards from the comfort of their homes and without the actual money leaving their pockets at that particular moment. They forget about the debt they have created and tempt to shop more. The cycle continues, and people keep accumulating the debt which later becomes difficult to repay. However, the same people would not prefer to shop if they had to pay in cash for the same purchases, which means they fall for the trap created by credit cards and spend unnecessarily to impress others.

How to avoid it – To avoid overspending on your credit cards, it is essential to limit your expenditures and try not to use credit cards for everyday purchases. If you think you will not have control even after setting a limit for yourself, you should set your spending limit through net banking or by logging in to your credit card account online. The credit card will deny any spendings more than the limit set by you.

3. Choosing the Wrong Type of Credit Card:

There are a plethora of credit card issuers and types. But, the never-ending options create further confusion while selecting the right credit card. Many people fail to choose the right card that matches their requirements by getting influenced by the advertisements and offers. For example, if you are a student, you should opt for a Students’ Credit Card but if you wish to use your credit card for everyday purchases, a Shopping Credit Card or a Cash-back Credit Card could be a wise choice. However, if you are not a frequent flyer but opt for a Miles Credit Card, it might not be of much use to you.

How to avoid it – Before opting for a credit card, it is essential to understand its features and benefits. Instead of opting for any card that is offered to you by the issuer, choose the card that is best suited to you. Also, if you think your existing card is not right for you, it is advisable to get it deactivated.

4. Paying Only the Minimum Dues:

Many credit card holders create debt by spending more than they planned, which becomes unaffordable to pay on the due date of a credit card bill. People again fall into the trap of ‘Minimum Amount Due’ and pay only the minimum required amount. While doing this, many people are not aware that they will be charged interest on the unpaid amount until they repay it in full. The rate of interest is usually very high on credit cards, which ultimately increases the outstanding amount.

How to avoid it – You should always pay your credit card bills in full before the due date. If you have already created a debt, try to pay as much as possible to minimise the interest amount. Before making high purchase transactions have a proper payment plan in mind and be consistent in clearing the total dues on time. In addition, it is advisable to set an auto-pay to pay your credit card bills. It will ensure your credit card bills get paid automatically on the due date through your registered bank account.

5. Creating a Colossal Debt:

Spending more through credit cards and not paying your full bill on time may create a risk of falling into a debt trap that will become impossible to bear. Being in a situation when you struggle to pay your monthly bills can create financial stress. Many people get into the habit of borrowing and availing of another loan to pay the existing bills or opt for new credit cards for a balance transfer, thus disturbing their entire financial plan. With more EMIs to pay, you are left with less money for other essential expenses. In many cases, people have fallen into huge debt trap, which led them to depression.

How to avoid it – The only way to avoid this is to recognise the early signs that you are falling into debt trap. If you are struggling to pay your credit card bills in full, it might be a time to completely stop using your credit cards. Click here to know the warning signs of falling into a debt trap.

6. Using Multiple Credit Cards:

Many individuals try to hold several credit cards to get the benefit of the credit card offers from different merchants. However, managing multiple cards can be tricky since they all come with different features, credit limits, interest rates, and due dates. People with multiple credit cards tend to forget the due date of the bill payments, which results in unintentional default in repayment.

How to avoid it – It is advisable to hold a maximum of 2 to 3 credit cards based on your requirements. Moreover, as suggested earlier, set a standard instruction for auto-payment of all your credit card bills in full. Click here to know what is the ideal number of credit cards you should hold based on your lifestyle.

7. Sharing Sensitive Information:

It can happen that you fall into the trap of fraudsters who steal your credit card information from the websites you purchased or by pretending to call from a credit card company asking you for sensitive information like credit card number, CVV, and the PIN. There are also chances of your card getting lost or stolen.

How to avoid it – Although most credit card companies provide protection against such frauds, it is the card holder’s responsibility to keep the card safely and use it cautiously.

8. Not Using the Card Responsibly:

People use credit cards to build a credit history and improve their credit score quickly. However, if it is used irresponsibly, a credit card can damage your credit score in no time. If you don’t pay your credit card bills on time, your credit score would get affected. Not paying the credit card bills for a few months will negatively impact your credit score.

How to avoid it – It is crucial to use your credit cards responsibly. If you do not want your credit score to get negatively impacted, try to limit your credit card spendings to 30% of its total credit limit. It will help you to maintain a good Credit Utilisation Ratio (CUR) and improve/maintain your credit score.

9. Not Reviewing the Monthly Statement:

One of the common credit card mistakes that many of us do is not reviewing the monthly statement and blindly paying it in order to avoid crossing the due date. However, there could be instances of fraud or errors. Sometimes the fraud or error amount is so small that people do not realise it until they arise repeatedly.

How to avoid it – Reviewing your credit card statement carefully, as soon as it arrives is the best practice to follow. This way you will immediately come to know if there are any errors or fraud and you will get adequate time to check with the credit card issuer and resolve the issue.

10. Closing a Credit Card:

Many people opt for a credit card without understanding its usage or terms and conditions and then decide to close or cancel it to avoid any further issues. However, most of them do not bother to know the proper process and simply stop using the credit card or close the old cards when they get a new one. Not following the proper process of the credit card account closure can damage your credit score. And, closing the older cards will reduce your credit history.

How to avoid it – You should never simply stop using the credit card. Instead, you should follow the credit card account closure process set by your credit card issuer. Also, it is advisable to create a good credit history first and then close your old credit cards.

To Conclude:

Avoiding these common credit card mistakes will keep you away from financial stress. It is also advisable that you do not apply for multiple credit cards in a short duration or open a new line of credit if you already have a huge debt to repay or if the rate of interest is very high. Moreover, it is important to keep your credit utilisation ratio below 30% to improve/maintain a healthy credit score.

This article first appeared on PersonalFN here