Using a credit card can be convenient, especially for those new to the system, but if not used wisely, it can lead to trouble. Whether you’re shopping for Diwali or managing everyday expenses, credit cards offer perks like cashbacks, reward points, and short-term loans. However, with these benefits comes the responsibility of managing your spending wisely. Let’s take a closer look at five common mistakes new users should avoid to protect their credit score and avoid unnecessary debt.
1. Don’t Use Too Much of Your Credit Limit
It’s easy to get carried away with spending when you have a credit card, but it’s important to limit your usage. Financial experts recommend using only up to 30% of your credit limit. For example, if your card limit is ₹1 lakh, try to keep your total expenses under ₹30,000.
Why? Excessive spending not only impacts your credit score but also gives banks the impression that you may struggle to manage your finances. If your credit utilization ratio (the percentage of your used credit limit) stays high, it can become harder to get loans or other credit in the future.
2. Avoid Closing Cards Suddenly
If you have multiple credit cards, you might be tempted to close some to simplify your finances. However, suddenly closing a credit card can hurt your credit utilization ratio and credit score. Each credit card contributes to your overall credit limit, so canceling one will increase the percentage of available credit you are using.
For example, if your total credit limit across two cards is ₹2 lakh and you close one card with a ₹1 lakh limit, your credit utilization ratio will increase. Even if you don’t actively use a card, it’s better to keep it open to maintain a healthy credit profile.
3. Avoid Cash Withdrawals Using Your Credit Card
Many credit cards offer a cash withdrawal facility, allowing you to take out cash when you’re in urgent need. However, it’s better to avoid cash advances entirely. Cash withdrawals come with hefty charges and often don’t offer any interest-free period.
For example, withdrawing ₹10,000 from your card can attract high fees, which will accumulate until the amount is repaid in full. This can quickly add up and lead to unnecessary debt. Use a debit card or other alternatives instead if you need cash.
4. Be Careful When Using Your Card Abroad
Some credit cards offer the option to use them internationally, but this convenience comes with hidden costs. When you use your card abroad, you’ll likely have to pay a foreign currency transaction fee, which is usually 2-4% of the transaction amount.
If you’re traveling, consider prepaid forex cards as a better option. These cards allow you to load foreign currency in advance and avoid most of the extra charges associated with credit card use overseas.
5. Always Pay the Total Due, Not Just the Minimum
When it’s time to pay your credit card bill, you’ll notice two amounts: the total due and the minimum due. While paying the minimum amount might keep your card active, it’s not a good practice. If you only pay the minimum due, the remaining balance will attract high interest.
Credit card companies charge monthly interest rates between 2-3% on the outstanding balance. Over time, this can result in mounting debt that’s difficult to manage. To avoid this, always pay the total due amount on time.
Extra Tips to Use Credit Cards Wisely
- Track Your Spending: Monitor your card usage regularly to avoid overspending.
- Set Payment Reminders: Timely payments are essential to maintain a healthy credit score.
- Avoid Unnecessary Purchases: Credit cards can make impulse buying tempting. Stick to your budget to prevent debt.
- Check for Fraud: Keep your card details safe and report suspicious activity immediately.
- Understand Card Terms: Know all the fees, rewards, and conditions before using your credit card.
Using a credit card for the first time can be exciting, but it also requires responsible financial behavior. Avoid these common mistakes, use your card thoughtfully, and enjoy the benefits without falling into debt traps. A little caution today will ensure that your credit score stays healthy and your financial future remains bright.
