Behavioural biases that damage your investments!
In matters of investment, the sooner you acknowledge your mistakes, the sooner you'll find help in getting out of the soup. To break free from biases, the first step should be to identify those biases, says, Balwant Jain, Tax and Investment Expert.
If used wisely, credit cards offers convenience and great benefits. However, card holders can easily fall into a debt trap if they spend beyond their repayment capacity or delay repaying the dues on time. Moreover, lack of product awareness can also lead card holders to make wrong choices, many of which can adversely impact their financial health.
Let us take a look at 5 warning signs of credit cards misuse and what you can do to avoid it:
Maintaining credit utilisation ratio over 30%
Credit Utilisation Ratio is the proportion of the total credit card limit utilised by you. As lenders usually consider those having credit utilisation ratio of over 30% as sign of credit hungriness, credit bureaus may reduce your credit score by a few points once you breach this mark.
What you can do: Try to limit the overall credit card spends within 30% of your total credit limit. If you frequently breach this mark, either request your existing credit card issuer to increase credit limit or opt for an additional credit card. Doing so would reduce your credit utilisation ratio, provided you do not increase your credit card spends after obtaining a higher credit limit.
Repeatedly paying the minimum amount due
Credit card users often assume that repaying just the minimum amount due would save them from incurring finance charges. While paying off the minimum amount due on time would save you from incurring late payment fee and any adverse impact on credit score, card holders may still levy hefty finance charges of 23%-49% on the unpaid dues. Non-payment of the entire credit card dues can lead to revocation of the interest-free period on fresh transactions, till you repay unpaid dues in full.
What you can do: Convert the proportion of bill that you are unable to repay into EMIs if you are facing difficulty in repaying the entire credit card bill in one go, you can The interest cost of EMI conversions are much lower than the finance charges, and come with tenures ranging from 3 months to 5 years. This would allow you to repay the unpayable portion of your credit card bill at much lower interest rate, in smaller tranches as your repayment capacity. Additionally, you will continue to benefit from the interest-free period of fresh card transactions.
Not paying attention to reward points expiration date
The reward points earned on making credit card spends can be redeemed for purchasing gift vouchers, conversion into air miles, making purchases at select merchant outlets and/or online partners, adjusting outstanding bills, etc, depending on the reward point program of credit cards. However, accumulated reward points of most credit cards come with an expiry period of 2-3 years. Only a few card issuers tend to offer credit cards with no expiry date on the reward points.
What you can do: Always keep a track of the validity of reward points along with various terms and conditions related to their redemption. This would allow you to make the most from accumulated reward points.
Not increasing credit limit
Credit cardholders often avoid enhancing their credit limit owing to the fear of increased card spends and the possibility of falling into a debt trap. However, when used judiciously, an enhanced credit limit can go a long way in improving your financial health.
What you can do: Take into consideration the credit limit enhancement offer extended by your card issuer. Accepting a higher limit will increase your financial capacity to deal with financial emergencies or make higher spends. An enhanced credit limit would also reduce your credit utilization ratio, which will positively impact your credit score, thereby enhancing your future card and loan eligibility.
Withdrawing cash through credit card
Cash withdrawals made through your credit card attract cash advance fees of up to 3.5% of the withdrawal amount. In addition to this, card holders also levy finance charges, right from the day of such withdrawal until their repayment.
What you can do: Avoid cash withdrawals through your credit card to the extent possible. If it totally becomes unavoidable, make sure you repay the entire withdrawn amount as soon as you can. This will reduce the additional interest cost incurred through finance charges.
(The writer is Senior Director — Paisabazaar.com. Views expressed are personal)