Ever since its introduction in the 1950s, credit cards have arrived and how! These small, unassuming pieces of plastic have completely changed the entire landscape of the financial world. From paying for goods and services through cash, sometimes hording a large amount to pay for expensive purchases, to paying for the same through credit, spending practices have come a long way. Apply for credit card to make use of it well with all rewards and perk.
Credit cards are essentially plastic money that allow individuals to pay for their purchases on credit and repay the same during the next billing cycle. In other words, individuals can pay for their purchases through small loans that can be availed instantly. Just like loan repayment, individuals will have to pay this amount back during their billing cycle. If the loan amount is not paid completely, interest will be charged on installments as well.
Credit cards come with a number of benefits such as convenience of paying, Reward Points, other perks with spends, and so on. However, too much of a good thing can be bad and not utilizing a credit card the right way can have serious repercussions on an individual’s finances. Although it is convenient to purchase products and services on credit with the intention of paying later, if the payment is not made on time, a heavy interest will be levied on the payment. If this continues, the person will spiral into debt which will be hard to recover from.
Given below are some of the common mistakes that are made by credit card users which will lead them into a credit card debt trap.
Not understanding the card
There are a plethora of credit cards available in the market today with various features, benefits, rewards, rates of interest and so on. All banks and financial institutions entice customers to purchase the credit cards that they offer, which may result in the customer getting thoroughly confused and purchasing the card that is not meant for them.
For example, if the customer in question is one who travels a lot for work or pleasure, purchases a card that provides dining benefits instead of AirMiles, it may not be as beneficial for the individual, resulting in their either wasting the credit limit or spending more money on purchases that are otherwise not needed. Additionally, if the individual is unable to repay the amount charged to his/her card in one go, interest will be charged. This in turn will lead them into a debt cycle which is not easy to come out of.
Buying an expensive card
As consumers, all individuals are flooded with offers to purchase new credit cards. Banks even call customers with the goal of persuading them into buying their credit cards while talking about the benefits that it will bring. However, not all credit cards come for free, or a low fee. Certain cards come with a relatively hefty annual fee and renewal fee as well. The benefits that are provided may not even be necessary.
Additionally, certain cardholders treat their credit card as a source of money. It has to be understood that owning a credit card is similar to procuring short loans. It needs to be paid off at the earliest and in full else interest will be charged on these purchases. A washing machine or refrigerator may seem affordable in the beginning but as the days add up, it will become more expensive. Unless individuals can pay the same, credit cards should not be used in such a manner. Ideally, an individual must only borrow 20% of their annual income. Therefore increasing one’s credit limit should not be an option that is frequently explored.
One of the biggest mistakes that are made by cardholders is using their credit card to withdraw cash. The interest charged on the same is exorbitant and therefore must be avoided at all costs.
Paying the complete amount
Credit card users are provided with easy ways to make their payment. They have the option to pay only their minimum amount that is due or can pay the entire bill amount in full, which is recommended. This is in addition to paying the card fee as well, if applicable.
It is important to note that if card holders pay an amount that is less than the entire bill amount, then an interest rate will be charged. In case they are unable to pay even the minimum amount due, it would be considered as credit card default which can also affect the credit score in addition to attracting a fine. It is convenient to assume that paying the minimum amount due is enough each month, however, keeping in mind the rate of interest charged, the total amount that is to be paid will balloon up to almost double the original bill amount that was to be paid. Hence, cardholders must always try to pay their entire bill amount in one go.
Keeping track of payments
Paying a credit card bill in full before the due date is ideally the best way to use a credit card. Although individuals have the option to pay just the minimum amount that is due and get away with it, it is not recommended. This is because, paying the credit card bill in installments will rack up interest that can add up to a substantial amount in time.
Additionally, not paying the credit card bill before the due can also result in interest getting added up. This amount varies from bank to bank but it is important to note that this adds up to a substantial amount. Also, cardholders should note that the interest will be charged on the full amount from the date of purchase.
Certain banks will also charge a late payment fee. These factors may not seem all that serious in the beginning, but if interest rate and additional fees start getting added up, within a short period of time the individual will start getting deeper into debt. It is important to note that getting out of a debt trap is not easy by any means.
Getting into a credit card debt is by no means difficult as a few careless purchases and undisciplined payment method will ensure the same, it is getting out of a debt that is the issue.
Hence, it is best to follow certain tips to avoid debt. However, if an individual has gotten into a credit card debt, there are certain ways to get out of it as well, such as borrowing from family and friends to pay off the loan, availing a personal loan, keeping track of expenses, utilising credit card balance transfer option and so on.
Healthy credit practices will ensure a good credit score and ease of borrowing in the future.