6 don'ts of using your credit card

Buying groceries, shopping etc using the credit card has become a way of life for urban Indians. While it's primary benefit is the convenience it brings in, it is slowly becoming a tool to fulfil wants that otherwise your bank account cannot support.

A mechanism to accumulate reward points, an easy credit line and sometimes even a status symbol.

A credit card is a powerful instrument but unfortunately it's easily availability leads to it being easily misused. A credit card brings purchasing power, which is often used to fulfil desires than needs.

If usage of credit card is not monitored and controlled, it is a sure shot way of landing you into a financial mess which would then take a rather long time and often a lot of money to clean up!

Let us look at what you should abstain from doing when it comes to credit cards; which is as important if not more important than what you can do with it.

So here are some things you must never do with respect to your credit card.

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Kunnath Santhosh, Co-founder and Director, Perfios software Solutions Pvt. Ltd.  Perfios (www.perfios.com) offers an online Personal Finance Software Solution that provides a 360 degree view of one's Personal Finance with very little manual effort.

1. Spending more than your ability to pay

A credit card allows you to incur expenses up to the credit limit of your card. Also, depending on the date of purchase, you get a credit period ranging from a few days to almost two months. With easy credit in hand, people often tend to go overboard in their perception of how much they can afford.

If one were to analyse credit card spends of people, more than ninety percent will be on items they don't need or they could have postponed. Once the bill comes up for payment most people realise that they don't have enough money to pay up in full.

It is then that the cycle of paying minimum amount or partial payments starts.

Since a credit card is an easy form of credit, it is the most expensive one too. Outstanding amount could attract an interest of anywhere between 2 per cent to 3.5 per cent per month which means a whopping 24 per cent to 42 per cent on an annual basis.

Besides, the interest is calculated from the date of transaction and not the due date, so you even lose the credit period. No wonder it doesn't take long for small credit card debt to blow up into a huge one. So follow the rule to spend only as per the size of your pocket and not your credit limit.

2. Using credit card for big-ticket expenses

If you are planning certain big-ticket expenses, like say, marriage related expenses, purchase of luxury items etc. for which you need more money than usual, refrain from using credit card for such expenses.

The reason is that you may not be in a position to clear off the dues for such large expenses in a short period and would land up paying hefty interest charges as mentioned earlier.

Explore other options such as a personal loan or advance against salary that would definitely be cheaper than running a credit card debt. A personal loan is the most expensive loan but definitely scores over credit card since the interest rate may be anywhere between 15 to 20 per cent.

If you have a good credit history, you can also bargain for a better rate.

3. Withdrawing cash using the credit card

Except in case of extreme emergencies where no other options are available, do not ever use your credit card to withdraw cash. The banks charge a hefty 2.5 per cent to 3.5 per cent interest per month on cash advances.

In addition, some banks would also charge a transaction fee for the withdrawal. With the massive charges involved, withdrawal using a credit card is a strict no-no.

4. Using credit card for day-to-day expenses

Using a credit card for your routine expenses such as groceries, vegetables and other essentials is a bad idea. It is better to have a monthly budget for these things and use cash or a debit card to make purchases.

For one, this helps you to keep a track of your routine expenses and allows you to spend only as is necessary. With people increasingly using malls or supermarkets for everyday purchases, impulsive buying becomes difficult to control.

Credit cards act as a catalyst to this habit. To refrain from overspending, keep your credit card away.

5. Using credit card for online purchases at unsecured websites

A large section of people are now using online banking and credit cards to make purchases on the web. While this is the way of shopping, going forward, extreme caution needs to be exercised while giving credit card details for online shopping.

One must always check that the website is secure before giving card details.

Secure sites have 'https' instead of 'http' and usually have a security sign such as 'Verified by VeriSign' or the likes.

Never respond to mail asking for your credit card information.

6. Using credit card to gain more reward points

If you use credit card, you may be entitled to reward points which can be redeemed for gifts. Often credit card companies announce schemes or run promotions for limited periods where people can earn more reward points, if they spend during that particular time.

Do not let such promotions tempt you because to earn more points you may land up making unnecessary purchases burdening your finances.

Do not forget that a credit card is a form of debt and credit card companies profit from your indiscipline. Be judicious while using credit cards; spend wisely and know where to stop. Only then this instrument will be a friend and not a foe.