The credit card is one of the most important financial inventions in modern times. However, this much-sought-after boon can be a real bane to your finances if not used with care. Here are a few instances when you should restrict the use of credit cards in order to keep your finances in order.
Using credit cards for daily expenses:
This is one of the most common instances when people use credit cards — to buy their day-to-day items. While using credit cards to purchase groceries and household items is not always bad, using it regularly may result in your overspending and crossing your monthly budget. Always draw up your budget for such purchases and use your credit cards within this limit. Beyond this, it is better to use cash or debit cards.
Using credit cards for cash advances:
Drawing money from an ATM through your credit card to meet emergencies is an easy way to combat cash shortage; but have you realised the impact it will have on your finances?
Not only is the interest rate charged on the amount is high at 2.5 to 3.5 per cent per month, but it is charged from the day one itself.
Using when your cash flow is restricted:
Credit cards come with a free credit period of 20 to 50 days. If you do not pay your bills within the due date, you will be charged a hefty late payment fee, high interest of 2.5 to 3.5 per cent per month and also taxes on these charges.
Hence, if you think that you will not be able to generate cash flows to pay credit card dues by the due date, it is best to refrain from using it.
Using credit cards in foreign countries:
When you use your credit card for transactions in a foreign country, you are usually required to pay a charge on foreign currency transactions. Also, do not forget the exchange rate fluctuations, which determine the amount you will have to pay. If you opt for a prepaid currency card, it will help you better.
Using credit cards to get reward points:
In order to attract customers, credit card companies offer various offers and high reward points on purchases made. While accumulating reward points is good, spending on your card only for this reason is not very healthy. You will soon realise that even though you have high reward points on your card, you will have to pay hefty bills, sometimes even on unnecessary purchases made without forethought.
Using credit cards at unsecure websites:
Online shopping has, of late, become very popular. While it is a convenient way of shopping, you must refrain from using your credit card and sharing confidential information on websites, which are not secure. Always check for security levels before making credit card payments in such cases.
Using credit cards nearer to credit limit:
It is best to stop using your credit card when you are close to your credit limit. This is not only good for your credit score, but also helps you keep a check on your expenses levels.
Using credit cards just for discounts:
Do not use your credit card indiscriminately as soon as you see a discount sale. This is a sure-shot way of exceeding your budget and spending more than you can afford.
Be prudent when you use your credit card in such situations and purchase only what you really want.
When you use your card for unaffordable purchases, you will soon end up in a debt spiral, which affects your financial position gravely.
When you have many credit cards, you need to keep a note of the billing cycle and due dates of each card. Do not use the card which is closer to the billing date;
instead use a card which has a farther off billing date. This will give you a higher credit period and makes more sense to your finances. Remember, a credit card is not always the best option to spend. Nevertheless, it can work wonders to ease your financial situation, if used smartly, with care and discipline.
The writer is chief executive officer of BankBazaar.com