Credit card rules to avoid falling in a debt trap

In spite of various challenges and risks involved, credit cards are a popular financial tool today. We’ve been spoilt for comfort to an extent that ease of use and convenient pay-back options offered by credit card companies seem irresistible. The fact that credit cards make it possible for you to not only use extra funds but also receive reward points makes it an indispensable part of human lives.

While it’s true that deals and discounts offered by credit card companies may be unparalleled in terms of instant benefits but beware if you’re a procrastinator when it comes to repayments.

“Credit card is a good option if you use it as a facility only. It is plastic money and you don’t have to carry it around like cash. If you use a credit card, ensure that you clear off the dues on time. But you should strictly avoid using it for a purpose of availing of loans. Credit card loans are the worst and have exorbitant interest rates,” Finscholarz’s Renu Maheshwari said.

The freedom provided to credit cardholders in accessing the sanctioned credit limit increases the credit risk for card issuers. This is usually compensated by charging higher interest rates. But its luring benefits attract youngsters to use credit cards for instant gratification. However, the irresponsible usage of credit cards can easily put you in a vicious cycle of debt. So how to avoid it?

Don’t spend what you can’t pay off

This is a thumb rule that should be followed for every little expenditure and more specifically in case of credit cards.

“Spending can be extremely easy on your credit card. So don’t fall into this trap of spending. Spend within your budget and pay off the entire amount as and when the payment is due. Don’t factor in future income and spend. Spend only what you have even though it’s a credit card,” Shweta Jain, financial planner and founder at Investography said.

Don’t withdraw cash using credit card

Never withdraw cash using your credit card, although that is an option the bank offers. The interest rate is extremely high. The reason behind this isn’t limited to mere profit-making. It is due to the way credit is designed and the risk surrounding it.

“The unsecured nature of credit cards makes issuers charge high interests due to the higher credit risk involved. However, a more important reason is the credit line sanctioned in the form of a credit card limit. Unlike personal loans, credit card users do not have to submit applications for accessing instant credit. All they need to do is swipe their credit card or use it online and repay the transactions as per their repayment capacity,” Sahil Arora, director of Paisabazaar.com said.

Don’t pay the minimum amount due

This could be the key factor in taking you down. Don’t even look at the minimum amount due.

“Pay off what you spent and in full. The interest, penalties, etc can add up to quite a bit and a few months in, you’ll owe them a much higher amount and if not settled soon, this can get quite out of hand. I know someone who had to sell off their car after 2 years of paying minimum amount just because they thought that’s what they needed to pay,” Jain said.

Don’t take multiple cards

Managing multiple cards can be tricky. Ensure you take one or a maximum of two cards, track your spending on them, and settle them in full and on time. Rotating credit is not worth it if you are not in full control.

Don’t delay payments

Don’t miss your payment dates. Interest will be charged and penalties too. These can add up to quite a big amount.

“Pay the credit card bill on time as the interest cost is 36-42% p.a and the credit score gets impacted. Also once you get into a revolving payment trap, it is difficult to get out,” Mrin Agarwal, financial planner and founder at Finsafe India said.

Don’t add your credit card details everywhere and save them

Always check all charges on your card to ensure they are yours. Do not enter your card details on someone else’s computer or phone and do not sign in on to unsecured sites.

“Use your card responsibly and you will have built a good credit history for yourself. Use it badly and you’re looking at debt and a lousy credit score,” Jain advised.