New Delhi: If you pay off all of your credit card debt on schedule, you won’t be charged interest on this form of short-term loan. They do, however, come with risks if you use them carelessly, just like with any other kind of borrowing. You can minimise these risks and get the most out of your credit cards by using them responsibly and paying your payments on time.

Here are the main dangers of using a credit card along with tips for avoiding them.

Interest charges

One of the most expensive methods of borrowing is using a credit card because they have the highest interest rates, which typically range from 22% to 49% per year. However, the interest is only charged when the whole amount of the debt is not paid and when cash is withdrawn. New transactions also begin to accrue interest fees on the first day when the full amount due is not paid, making the interest-free period ineligible.

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Many cardholders continue to believe that it is sufficient to pay the “minimum amount due,” even though some may be forced to pay interest expenses owing to financial restrictions. You only avoid the late payment fees by making the minimum amount due. However, the amount you could save on the late payment fees could be greatly outweighed by the interest charges on the unpaid debt and additional transactions.

How can you avoid it?

It is always advised to pay the total amount due on your card on or before the due date. “If you cannot afford to make the full payment, try to convert the dues into EMIs and pay them off in smaller installments over a few months. If that is not possible, you can also take a personal loan or avail the balance transfer facility; all these methods would be economical in comparison to finance charges applicable. Also, avoid cash advances as they incur interest charges from the first day,” says Sachin Vasudeva, Director & Head of Credit Cards Business, Paisabazaar.

Overspending

Credit cards provide you more purchasing power, which, especially for someone who likes to splurge, can easily result in overspending. Cards provide you cashback, discounts at well-known brands, and reward points, which may tempt you to make unneeded purchases. This can cause you to spend more money than you can afford to pay back.

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How do you stop it?

The best way to stop overspending is to follow a rigid budget. Regularly review the statements on all of your credit cards to determine where you are spending the most money and what might be avoided. Additionally, to make the most of the interest-free time, keep note of the billing cycles for each of your credit cards. Try to leave your credit cards at home when you go out and use other payment options like UPI, mobile wallet, or cash to avoid splurging if you find it difficult to resist temptation.

Adverse effect on credit score

The credit bureaus are also given access to your credit card payment history. Your credit score will be decreased if you make late payments, miss payments, or default on any of your credit cards.

Second, maxing out your credit cards indicates that you are overly dependent on credit, which could cause credit bureaus to reduce your credit score if you do it frequently.

How do you stop it?

Credit cards only help your credit score if they are used responsibly. The best method to achieve this is to constantly make your required payments on time. It can be preferable to set up standing instructions for payment or due date reminders for each of your cards if you frequently forget the due date.

In addition, you should refrain from using all of your credit limits. “If you struggle to maintain a low credit card use rate, it could be time to apply for a new credit card or request an increase in the credit limit on your current card. Avoid applying for many credit cards at once because doing so will lower your credit score. Instead, evaluate your eligibility, determine if it fits your needs, and then apply as necessary, advises Vasudeva.

Fraud transactions

Through phoney emails or phone conversations, fraudsters might obtain your credit card information and use it to make purchases. By copying your card at POS terminals (skimming), they may also commit fraud. Some people might even use identity theft to obtain a card with your name and PAN on it.

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How do you stop it?

Credit card fraud can be prevented by exercising caution and using your card safely. Never provide private card information to anyone. Make sure the card is swiped in front of you at the POS machine when making a transaction; do not give it to anybody else. To find fraudulent transactions or identity theft, periodically review your credit card bills and credit reports. Inform your card issuer or bureau as soon as possible if you discover any such anomalies in your reports.

Additionally, as it will enable you to maximise your value-back on regular purchases, you should always pick a credit card that complements your lifestyle. Instead of choosing a card based simply on the joining bonus or a pre-approved offer, make sure you are getting the most benefits for the cheapest price.

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