7 Signs Indicating Incorrect Usage of Credit Cards
When used correctly, credit can help you get out of financial challenges. While there are now many different types of loans available, a Credit Card is one of the easiest ways to acquire credit. Ask financial experts, and they would agree that Credit Cards are one of the most powerful financial tools.
However, the convenience with which they let you acquire credit often encourages people to end up making serious financial mistakes. Nevertheless, just like many things in life, there are a few signs which indicate a person heading towards a Credit Card debt trap.
If you use a Credit Card, these are seven signs you should be careful of:
1. Missing regular payments
Credit Card users are required to make the minimum payment on or before the due date every month. If you are missing regular payments because you are not left with enough to clear the dues, you are surely using the card more than you should.
Doing so cannot just attract a penalty but can also hurt your credit score.
2. Paying only the minimum amount
Your credit card statement has two components- minimum payment and total balance. How to use a credit card in the wisest way possible? By paying off the full balance every month. When you only pay the minimum amount, you avoid the penalty, late fee but you'll still be required to pay interest on the average daily balance. Continue doing this for some months, and it could cost you big in interest charges. Thus, while paying off only the minimum amount is a great tool, don't overuse it.
3. Increasing interest rate
You are charged an interest rate on the cumulative amount of your purchases if you do not pay it within the same billing cycle. The interest rate charged is at the sole discretion of the bank, and it depends on some factors. It could be as low as 1.25% per month or go up to 3.5% per month. One important factor that impacts the interest rate charged is your credit score. Thus, if you notice that there is an increase in the interest rate, it could indicate that your credit card use may be impacting your credit score negatively.
4. Not using credit cards at all
Thanks to the abuse of credit cards, some people are somewhat scared of them. To the point that many don't use a credit card at all in spite of having one. Credit cards are a great way to build your credit score and also help you earn reward points on every purchase. As long as you are disciplined, paying for your purchases through your credit card can land you many benefits and privileges. Thus, if you have a credit card and your statement is regularly showing no transaction, that may indicate that you are not realising the real benefits of your card.
5. Taking regular cash advances
The cash advance facility of a credit card is only for emergencies. However, if you have been taking advance quite regularly in the past few months, it is an indicator you might be spending more than you can afford. In other words, you are not planning your finances smartly.
Unlike credit card dues, there is no grace period with cash advances. You start paying interest on it as soon as you take it. Moreover, in most credit cards, you also pay a hefty transaction fee which could be around 2.5% of the total amount or even higher.
6. Frequent balance transfer
If you are trying to reduce your debt burden, one of the best ways to use a credit card is to use the balance transfer facility and switch to another card with a lower interest rate. Know that balance transfer is not a permanent solution to the debt problem but only a way to delay the problem. Use this facility, and it can be instrumental but overusing it can inevitably result in grave consequences.
7. Credit utilisation rate incorrect
The credit utilisation rate is the ratio of your outstanding balance to the maximum limit of your credit card. Your credit utilisation rate has a significant impact on your credit score. A good utilisation rate is anywhere between 25-40%. Anything lesser than that means you are not utilising your credit card well and anything more than that could indicate unhealthy use of your credit card.
Using credit card as a financial tool and not a financial burden
There are several answers to why use a credit card, but not many people understand how a credit card should be used. This financial tool can be a boon or bane depending on how you use it. Keep an eye out for the warning signs discussed in this post to use your credit card in the best way possible.
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