And here's how you can protect yourself!
It does feel good when you swipe a card and buy almost anything you want, right? That is the power of plastic money! But if you are using your credit card recklessly for the same, it's only a matter of time that you will find yourself in deep trouble because of an unmanageable debt pile.
Credit cards are good only for short term borrowing. People often tend to forget that and land themselves in a soup. Here are three dangerous things you need to bear in mind about a credit card and be aware of how you can save yourself from the pitfalls.
1. They make spending money seem so easy
'Spend now, pay later!' that's the concept behind a credit card you think. But before you know it, your bill arrives and you see that the outstanding balance on your card is way more than what you can afford!
But then there is always the facility of paying the minimum amount due, you would argue.
But do you know, that is exactly how you fall into a debt trap?
The minimum amount is only 5 per cent of the outstanding balance and may seem really convenient to pay, but in reality all you are doing is servicing the interest while the outstanding principal amount remains the same.
In fact, it keeps increasing if you continue to use your card for purchases. So in effect, your credit card bills are skyrocketing even if you are paying the minimum amount each month.
Besides, the grace period of 25 days is nullified if you have an outstanding balance on your card. The only thing is that you are not charged any late fee if you pay this minimum amount due.
How to protect yourself
In order to keep yourself from overspending on your card, use your debit card or cash to make all your regular purchases. Leave your credit card at home while you are going out shopping or for a meal with your friends. Keep the credit card for travel expenses or any large purchase only if you are sure you can clear the entire outstanding before the due date.
2. The peer pressure
There are 19 million (1.9 crore) credit card holders in India today and this number is increasing every day as young Indians join the ever growing workforce of the nation. With more and more disposable income, it has almost become a fashion trend to use a credit card. However, just because everyone else is using a credit card, doesn't mean you will have to do so too!
It is imperative for you to chalk out your financial goals and spend accordingly after you have saved enough. Have a credit card by all means, but make sure your credit limit is not too high and your credit utilisation does not exceed 30 per cent of your credit limit.
How to protect yourself
Do some experiments on your own and be conscious about whether you are swiping your credit card more often under the influence of friends.
If that is true, you need to consciously break this habit. If you are a spender by nature a high credit limit and peer pressure are a recipe for financial disaster!
3. A credit card can hurt your Cibil score
Making minimum payments on your card, may seem like a convenient solution to you, but over a few months, this very practice will wreak havoc on your Cibil score. Approximately 25 per cent of the credit score is determined by the amount of debt you carry.
If your revolving credit (unpaid dues on credit card) is too high it reduces your Cibil score, thus hampering your chances of getting credit when you are in dire need of it.
How to protect yourself
Do not indulge in unscrupulous buying and keep the expenses on your credit card under check. Also make it a habit to pay credit card bills in full each month.
A credit card is immensely convenient, but only when you use it for its true purpose, i.e. short term borrowing. As a consumer you need to align your financial priorities and limit the use of your credit card. If credit cards are a part of your monthly spending routine, it's time you revisited your financial goals right away!
Photograph: Pete Prodoehl/Creative Commons
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.
