Reckless credit card purchases, late payment and credit transfers can lead to a debt trap. And unpaid dues can affect your credit score
Following the Covid-19 pandemic, credit cards have become one of the most popular forms of digital payments. The increasing use of credit cards points to consumer demand for innovative financing options and credit constructs in an increasingly digital ecosystem. For most banks, the card issuance process is end-to-end digital, with video verification to speed up the know-your-customer (KYC) process.
The credit card to debit card ratio, a key indicator of increased credit card adoption, rose to 7.5% in January this year from 6.9% in the same month last year and the credit card spend to debit card ratio rose to 1 .5x in January this year from 1x in January last year, according to an analysis by Axis Securities.
For the current fiscal year to January, credit card spending has grown 57% year-on-year to Rs 7.81 trillion, from Rs 4.98 trillion in the same period in 2020-21. The increased card spending is the result of increasing discretionary purchases, an increase in domestic travel and a gradual reopening of international travel.
Credit cards are safe and easy to use. However, reckless spending, late payment and credit rollover can lead to a debt trap. Long delays and unpaid credit card charges affect your credit score, and banks may be unwilling to give you an education, car, or even a home loan.
So, to avoid getting caught in a credit card debt trap, here are four factors to consider before pulling the card.
Find a low cost card
Look for a credit card that charges lower interest rates and no or lower annual fees. Credit card issuers charge fees such as cash advance fees, late payment fees, ECS/check bounce fees, and statement requests for more than three months. Experts say credit card cashbacks can entice cardholders to spend more, which can later lead to a debt trap if the individual is unable to pay the outstanding amount on time.
Use card rationally
The credit limit is determined by the credit card issuer at the time the card is issued. Preferably use credit cards for emergencies or for fixed or recurring monthly expenses. Most banks give a credit period of 4-5 weeks from the day of spending to the date of the billing cycle. During that particular period, credit card expenses are like an interest-free loan, provided you repay the amount before the due date. Ideally, you pay the entire outstanding amount. However, if you are short of money, you may pay more than the minimum amount due, which is calculated as 5% of the outstanding balance, or the sum of all installments, interest/other bank charges and the amount charged on the credit. limit use if necessary.
Prevent credit rollover
Rolling over credit on a credit card is a lot more expensive than a personal loan. Banks may charge an interest rate of 3-4% per month on all outstanding amounts that are rolled over and the interest will be charged on the daily balance on your credit card. So, if you’re rolling over the credit, don’t try to use the same card for a transaction until you’ve settled the full outstanding amount. Because during that period, banks charge interest on all transactions, which will increase the outstanding dues and lead to a debt trap. Existing credit card holders should look for a low-interest card and then transfer the outstanding debt from the higher-interest card to the one that charges less. This will reduce outgoing interest and help avoid any debt trap.
Payment default hits credit score
If you can’t pay the credit card bill on time, your credit score can take a hit. If you are unable to pay the outstanding amount, it is better to convert it into equated monthly installments and pay them regularly. Otherwise, take out a personal loan, where the interest will be 15-20% per annum, to pay off the credit card owed. Avoid any sort of debt settlement with the bank as it will affect your credit score.
Life on credit
Look for a credit card that charges lower interest rates and no or lower annual fees.
Use credit cards for emergencies or for fixed or recurring monthly expenses.
If you are transferring the credit, do not attempt to use the same card for a transaction until you have settled the full outstanding amount.
If you are unable to pay the outstanding amount, convert the amount into EMIs and pay them regularly.
This post Borrow: swipe your credit card? Think again was original published at “https://www.financialexpress.com/money/borrowings-swiping-your-credit-card-think-again/2464340/”