How Reckless Use of Credit Cards May Damage Your Financial Health?

September 20, 2021 Mutual Fund

A credit card is a convenient tool to manage your finances, as it can help you buy anything from as basic as groceries and medicines to luxurious items like air conditioners and smartphones. In addition, credit cards function on a deferred payment basis, which increases the purchasing power of cardholders. Unfortunately, however, many people get trapped in debts with all these alluring benefits offered by credit cards, leading to financial stress.

How can credit cards damage your financial health?

A credit card opens a new line of credit for you. If you cultivate better credit card habits, a credit card can help you improve your credit score, build a credit history, earn rewards, help in emergencies, and improve your purchasing power. However, the reckless use of credit cards can damage your financial health.

• Temptation to shop more:

  As you do not have to spend the actual money from your pocket, you tend to buy more than your budget. 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 moment. They forget the debt they have created and tempt to shop more. The cycle continues, and people keep making the debt which later becomes difficult to pay.

  However, the same people would not prefer to shop if they had to pay for the same purchases in cash, which means they fall for the trap created by credit cards and spend unnecessarily to impress others. To avoid this, it is essential to limit your expenditures and try not to use credit cards as much as possible. 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.

• Paying Minimum dues:

  The credit card holders create a 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 Pay' 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 makes the outstanding amount even higher.'

  Therefore, 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. 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.

• Creating a colossal debt:

  Spending more through credit cards and not paying your full bills on time may create a risk of falling into a huge debt 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, disturbing their entire financial planning. With more EMIs to pay, you are left with less money for other expenses. In many cases, people have fallen into huge debts, which led them to depression.

  The only way to avoid this is to recognise the signs that you are falling into debt. If you are struggling to pay your credit card bills in full, it might be a time to stop using your credit cards.

• Poor credit score:

  People use credit cards to build a credit history and improve their credit score quickly. However, if 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 gets affected. Not paying the credit card bills for a few months will befoul your credit score.

  Therefore, it is necessary 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 maintain a good Credit Utilisation Ratio (CUR) and improve/maintain your credit score.

• Using multiple credit cards:

  Managing multiple cards can be tricky since they all come with different features, credit limits, interest rates, and due date. People with multiple credit cards tend to forget the due date of the bill payments, resulting in unintentionally defaulting the repayment.

  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.

• Not reading the terms and conditions:

  Many a times, people trust the words of a salesperson who represents the credit card company. However, salespersons might not upfront tell you all the hidden terms and conditions or charges to make a sale. Moreover, such charges and terms are mentioned in a small font on the credit card brochure and website. There can be many hidden fees, like annual fee, late payment fee, forex fee, cash withdrawal fee, etc., which people might ignore while opting for a card. There were many instances when cardholders were told that the credit card is lifetime free, but the company charges an annual fee after a year or two. When a cardholder complains about it to customer care, they are told that there is a minimum spending requirement to get the benefit of an annual fee waiver.

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

• 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.

  Although most credit card companies provide protection against such frauds, it is the card holder's responsibility to use the card carefully.

To Conclude:

A credit card can be a boon during emergencies, whereas a curse if not used properly. Therefore, using your credit cards responsibly and cultivating better credit card habits is vital to avoid the reckless use of credit cards that may damage your financial health.

This article first appeared on PersonalFN here