Credit Mistakes To Avoid To Keep Your Finance And Credit Score Strong

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Credit can be a complicated concept for some. There are some common mistakes individuals make that negatively impact their credit scores. These single mistakes can snowball into more serious issues if left uncontrolled.

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A credit card is a great asset, but when you use it incorrectly it can cost you a balance and pay high-interest rate charges. Miss a payment and incur a late fee. Close a credit card and ding your credit score.

Credit Mistakes To Avoid To Keep Your Finance And Credit Score Strong

Credit Mistakes To Avoid To Keep Your Finance And Credit Score Strong

1. Missing Payments of Credit Card Bills

Many credit card users think that missing a few payments on a credit card is not a big deal. However, missed payments or even late payments can lead to huge debt.

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This is because whenever you miss a payment, interest charges are levied on your unpaid balances. The important point to note is that credit card interest rates are the highest, ranging from 2% to 3.5% per month, or higher. Also, the interest is levied daily and hence increases day by day, leading to huge debt. That’s why it is necessary to pay your credit card bills in full and on time.

2. Only Paying the Minimum Amount Due

Credit card issuers make it convenient to repay your balance by allowing minimum payments. However, it is not advisable to only pay the minimum due. Paying the minimum amount and revolving the balance to the next cycle can equally damage your finances as any missed or late payment.

This is because interest is levied on the unpaid balance and even when you pay only the minimum amount, the interest charges will be levied on the remaining balance.

When you have an unpaid balance left, any new transactions that you make on your card will also attract interest charges from the very first day. Hence, it is always advisable to pay your credit card dues in full and on time. If however, you cannot afford to pay the total due, you should try and pay off as much balance as you can.

3. Taking Cash Advances and Spending on Unnecessary Things

Taking out a cash advance happens to be one of the costliest things you can do with your credit card. It may look like the most convenient way of getting some cash at your disposal, but it is also the most expensive one.

As soon as you withdraw the cash, the interest starts accruing on the amount withdrawn. Also, cash advances on credit cards attract an additional fee. Some banks charge a flat amount while others charge it as a percentage of the amount withdrawn.

It is important to know that in cash advances (just like in case of missed payments), the interest-free period becomes void and on your new purchases you will have to bear the interest costs from the day of purchase. This significantly adds to your debt. Also, you will have to pay a one-time cash advance fee which is usually charged as a percentage of the amount withdrawn or a flat maximum fee, whichever is higher.

4. Not Maintaining Credit Utilization Ratio

Using the majority or even all of your available credit limit is not considered a good idea. When you do this, your credit utilization ratio becomes very high which might lower your credit score. Credit experts advise maintaining a utilization ratio of 30% or below.

But if you cannot maintain this ratio, try and keep at least 20% of your total credit limit free. This not only helps you in maintaining a good credit score but also ensures credit availability during emergencies.

If you are on the verge of exceeding your credit limit, try paying in cash for the subsequent expenditures. If in case you tend to often break the limit, either request the card issuer to increase your limit or get an additional credit card to increase the total credit limit.

5. Not Choosing a Right Credit Card

Getting a credit card without being aware of the terms and conditions associated with it is a very common mistake people tend to make. Suppose you are not someone who frequently travels, then choosing a credit card that is primarily focused on providing travel benefits, is not preferable for you. In such a situation, you will neither be able to avail the benefits of the card nor will the card be able to fulfill your requirements.

Each credit card focuses on a specific type of transaction by offering higher reward points, discounts or cash-back offers on them. Analyzing your spending pattern will allow you to choose a card that offers maximum benefits on your expenditures. For example, if you regularly commute to your office in your car, then using a fuel credit card will offer more benefits on refueling than a shopping or a plain-vanilla rewards card. Also, ensure that your savings through credit card transactions are higher than the annual maintenance charges levied by your credit card issuer.

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For example, if you are someone who is looking for a cashback credit card, then Axis Ace would be a preferable choice for you. Similarly, if you are a frequent online shopper, then Flipkart Axis Credit Card or Amazon Pay ICICI Credit Card would be great choices for you. So, always analyze your spending pattern before applying for a credit card and choose a credit card that fulfills your requirements the best.

6. Using a credit card to withdraw cash

Banks charge a cash advance fee for withdrawing cash with your credit card. This fee can go up to as high as 2.5% of the withdrawn amount. Moreover, unlike other credit card transactions, cash withdrawals attract finance charges right from the day of the cash withdrawal till the date of repayment. Thus, withdraw cash through your credit card only when it is unavoidable and repay the entire amount as soon as you can.

7. Applying for too many credit cards within a short period

Every time you apply for a credit card, the card issuer will fetch your credit report from the credit bureaus. These credit report requests raised by card issuers are considered as hard enquires and are reported in your credit report. Too many hard inquiries within a short period will depict you as a credit-hungry person and raise doubts about your debt repayment capacity. This will lead the credit bureaus to reduce your credit score.

8. Not redeeming your reward points:

The reward points of most credit cards come with predetermined expiry periods. For example, the reward points of HDFC credit cards expire after 2 years from the date of the transaction while the reward points of Axis Bank credit cards have to be used within 3 years of earning them. Make sure to go through the terms and conditions of your credit card’s reward point program and redeem them before their expiry.

Credit cards can be a great tool for making payments and reducing your transaction cost. Visit online loan aggregators to compare the various credit card options available on your credit score. Some aggregators also provide the expected savings generated through each credit card. Ensure to spend within your means and pay your entire dues within the due date. Avoid credit cards for making cash withdrawals and do not spend beyond 30–40% of your total credit card limit.