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How Not to Use a Credit Card?
Excessive use of credit cards is the one thing you might regret when you sit down at the end of the year to review your finances. These plastic cards are easily accessible, and the limit is decided based on your profile. This often makes people believe that they can use the card till its limit without any harm. But that’s not true. Experts suggest you should never swipe your card for expenses you cannot afford to complete on the bill's due date. Also, you must keep your credit card utilization within 30 % of your approved limit.
 

Things to Avoid when using a Credit Card

 
  1. Paying EMIs

    Many people use their credit cards to pay EMIs. Several fintech began offering EMI payment schemes via their cards, with a few even offering rewards for such payments by extending support to this trend. While this might seem harmless, using your credit card for making EMI payments can land you in a debt trap. Credit cards are a type of loan and if you do not clear the loan amount before the billing cycle then the interest levied is very high.
    Rather than using your credit card to pay for EMI, request your personal loan provider to extend the term. You must always check your EMI affordability before availing a loan.
     
  2. Big Ticket Purchase 

    While comparing other loan products to credit cards, the latter usually has a lower limit. Using a credit card for large purchases, even if the total available limit is high, is a bad idea. Assume you want to buy a sports bike worth Rs 1,00,000. The available card limit on your profile is Rs 1,25,000. If you use the card to purchase the bike at the dealership, your utilisation rate will be 80%.
     
    According to the credit bureau, consuming over 30% of revolving credit hurts your credit score.
     
  3. Business Capital

    Raising funds for your business is not an easy task, especially if you are running a start-up.
    There are numerous examples of businesses failing miserably because of lack of funding. In such situation, you might feel like using your credit card can help you handle your urgent financial requirements. But this is a grave mistake.
     
    Using a credit card for business investments can land you in a debt trap. You should seek assistance from angel or equity investors. Nothing beats a personal loan if you want to start a business while still working.
     
  4. International Travel

    People prefer to bring credit cards with them when they travel abroad for shopping and other small purchases. But did you know there are fees for international transactions? The lender levies a fixed fee or a percentage of the amount borrowed. Thus, the more feasible option is to use a forex card to avoid these high fees.
     
    A forex card is a prepaid card that contains pre-loaded cash in the currency of your choice. They are inexpensive, and you can use them at international ATMs for cash withdrawals.
     
  5. Medical Bills

    Using a credit card to pay your hospital bills may seem like an easy alternative. However, there are several limitations of using a credit card. Firstly, there is a limit on your credit card. Secondly, you must repay your credit card debt before 30 days to avoid interest. But in case of larger sum this is not possible, which ultimately lands you in a high interest debt trap. It is always a better option to opt for a personal loan to take care of your medical expenses.
     
  6. Cash Advance

    Several credit cards allow cash withdrawals from ATMs. However, you may be unaware that such transactions incur interest from the first day of the transaction until it is fully repaid. Additionally, there are transaction fees. If the purpose of the cash advance is to deal with an emergency, you may use funds from a contingency reserve instead.
     
  7. School/College Fees

    School fees are recurring and expensive expenses. Using a credit card for such a payment makes no sense because you must first clear the previous month's dues before you can pay the fees for the following month.
     
    When it comes to paying for your child's higher education, the concept of 30% utilisation comes into play. The reason is that a graduation or postgraduate degree course is costly, and credit cards may not always help to cover the entire amount even if you use the entire limit.
     
  8. Downpayment

    A downpayment is necessary for debt products such as vehicle finance and home loans. If you do not even have enough money to pay 10-15% of the margin amount, this indicates financial instability. In such cases, borrowing to make things more affordable puts you one step closer to financial woes that could lead to a default situation.
     
  9. Groceries

    If you have a credit card, your inbox may be flooded with grocery-rewards offers. And in order to enjoy such offers, a certain amount of food items must be purchased. Most people who fall for such offers end up exceeding their budget and purchasing unnecessary food products. The scenario either leads to a default in payment or the degradation of perishable food items. 

Also Read: Instant Cash Loan vs Credit Card: Which is the better Option?
 

Conclusion

 
Avoid using credit cards if you are unfamiliar with basic financial management principles. Having it in your wallet may compel you to go on extravagant shopping sprees, weekly trips, and frequent dining out. But remember that relying on credit cards not only results in a low credit score but also increases the likelihood of falling into a debt trap. In the event of financial crises, you should try obtaining a short-term personal loan. 
 

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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