RAJIV RAJ | JUL 30, 2014, 11.39 AM | BusinessInsider.in
It does feel good when you can swipe a card and buy almost anything you want. That is the power of plastic money. But if you are using your credit card for the same, you may soon find yourself in deep trouble because of an unmanageable debt pile.
Credit cards are good only for short-term borrowing, but people often tend to forget that and land themselves in the soup. Here are three dangerous things about a credit card and you should know how you can save yourself from the pitfalls.
1. They make spending money seem so easy
Spend now, pay later – you think that’s the concept behind a credit card. 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 are being invited to fall into a debt trap? The minimum amount is only 5% 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 purchase. 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 the 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 when you go out shopping or for a meal with your friends. In fact, you should keep the credit card for travel expenses or any large purchase only.
2. Peer pressure can lead to financial disaster
There are 19 million credit card holders in India today and this number is increasing every day as young Indians join the fast-growing workforce of the nation. And thanks to the growing disposable income, it has almost become a trend to use a credit card. But just because everyone else is using a credit card, it doesn’t mean you will have to do so. However, it is imperative 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% of your credit limit.
How to protect yourself: Do some experiments on your own and take note whether you are swiping your credit card more often under the influence of friends. If that is true, you need to break this habit. If you are a spender by nature, a high credit limit and peer pressure would be a recipe for financial disaster.
3. A credit card can hurt your CIBIL score
Making minimum payment on your card may seem like a convenient solution but over a few months, this very practice will wreak havoc as far as your CIBIL score is concerned. Approximately 25% 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 unnecessary 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 the right reason – 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 is time you revisit your financial goals right away.
About the author: Rajiv Raj is the director and co-founder of http://www.creditvidya.com.
Source : http://goo.gl/y9vAUm