Today, credit cards have found their way in many wallets given the ease of procuring one and the convenience that it offers while making purchases. However, the ease of spending and repaying conveniently leads to cardholders using it irresponsibly at times. Consequently, they may face challenges in repayment of the dues, which may affect their credit score adversely.
In turn, it may make them ineligible for other loans or credit products. Many customers have found that he or she is ineligible for favourable credit terms because of an adverse credit score triggered by defaults on credit card dues.
There are ways in which credit card holders can make prudent use of their credit card. It will not only provide them with access to credit, but also boost their credit score. Here, we provide some tips to help you make the best use of your credit card.
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Do not swipe your credit card hastily
You see a new mobile on an e-commerce portal and desperately want to own it. You are tempted to whip out your credit card and buy it. Wait! Before swiping the card, check if there are cheaper loan options. Swipe the card after exploring all possible options, especially for high-value purchases. Often, the convenience offered by just swiping the card or punching in the details makes us oblivious to cheaper options. Swipe your card only after you have explored all options.
Do not use your entire credit card limit
Depending on various factors such as customer’s credit worthiness, past repayment behaviour etc., the customer is provided a credit card limit. This is the maximum amount that customers can spend using this card. Though, using a credit card regularly always helps building the necessary foot-print on credit bureaus, excessive utilization for a longer period is not advisable. For example, continuous utilization above a certain threshold will indicate credit-hungry behaviour which may affect credit scores negatively.
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Pay the credit card bill in full
Every credit card bill statement offers cardholders the option of paying either the Minimum Amount Due (MAD) or the Total Amount Due (TAD). The MAD is a fraction of the TAD. If the cardholder pays the MAD, the card issuing entity charges interest on the outstanding dues. Since a credit card is an unsecured credit product, the interest rates are significantly higher compared to secured loans. Hence, it is advisable to pay the TAD well inside the due date.
However, if you feel that you may be unable to pay the full sum, convert eligible transactions into monthly EMIs. That way, you will end up repaying with a lower rate of interest.
Refrain from withdrawing cash with your credit card
Credit cards are best used when purchasing goods or availing services. While credit cards provide cardholders with a facility to draw funds, the interest charged on the repayment of the same is pretty high compared to other sources of drawing cash. Besides, the interest is charged from the date of withdrawal. Hence, withdrawing cash over a credit card can be an expensive proposition and hence, best avoided.
Use your credit card points
Most credit card companies have loyalty programmes where points accumulated through use of the credit card can be redeemed for gifts, discount offers, etc. Often, the accumulated points can reduce your outflow while purchasing goods or availing services. Keep an eye on the points tally to gain maximum advantage from them.
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Look out for promotional offers
Promotional offers, especially during the festive season, offer great bargains over credit card spends. Plan your purchases in a way that can enable you to optimally use your credit card.
Swipe as per due dates
Cardholders can get up to 45 days of free credit, depending on when the card is used. Sign up for multiple cards and swipe them at different periods in a month depending on their bill dates to obtain maximum free credit period.
Credit cards, when used intelligently, can prove to be a blessing in the hands of the cardholder. However, if used unwisely, it can trigger a spiral of interest and cause recurring defaults. Use your credit card wisely to derive maximum benefits.
Sanchay Sinha is Country Head – Retail Banking, South Indian Bank.