When used responsibly, credit cards can help you save a considerable amount as well as build a strong credit score.
However, due to a lack of awareness, many users fail to maximise the benefits offered with the cards, while reckless use can also lead to a debt spiral that could be difficult to manage.
Hence, it is important to abide by some rules for responsible credit card usage.
Card choice
Each credit card is tailored to specific categories so it is important to understand spending patterns and choose the right credit card that aligns with your preferences.
For instance, if you frequently shop online, opt for a credit card that offers accelerated benefits on online shopping.
However, if you are looking for shopping, travel, and dining benefits in a single credit card, you should look for an all-rounder card with more benefits.
Timely payment
One of the most common reasons why people fall into debt is missing bill payments or paying only the minimum amount due.
Missed or partial payments not only lead to high interest charges but can also damage credit score. When you pay the minimum due, interest is levied on the unpaid balance, and all fresh purchases also become ineligible for the interest-free period and attract finance charges from the first day.
So even a small missed payment can lead to debt accumulation. To avoid this, always pay the total amount due on your card on or before the due date.
Similar rules apply to cash withdrawals. They do not qualify for the interest-free period and until you pay off the amount, new transactions also attract finance charges. So avoid such withdrawals.
Maximise rewards
Most credit cards cater to one or two major categories where you would get higher value-back. Some cards may also offer higher rewards or cashback with select merchants. It is important to use the right card for the right purchase to maximise your benefits.
You should also be aware of the excluded categories where no benefits are on offer. Moreover, credit card reward points generally come with an expiry date so keep track of them, and redeem before their end-date.
Usage levels
The Credit Utilisation Ratio (CUR) is the percentage of total available credit that you are using, and it affects your overall credit health.
When you max out your credit cards often and are not able to clear dues on time, it shows you as highly dependent on credit.
This might increase your CUR, which could negatively affect your credit score. In such scenario, lenders may not be willing to extend additional credit to you, which could make it difficult to avail loans or credit cards.
Credit reports
It is important to check your credit report at regular intervals. Sometimes, your report might display incorrect information, such as the wrong credit card or loan account. These mistakes could be due to clerical errors but if unnoticed, such inaccuracies can have a lasting negative impact on your credit score.
Do keep an eye on this and whenever you notice any errors, get them rectified at the earliest. By following these five simple rules, you can make optimal use of your credit cards, save yourself from a debt trap, as well as get access to better credit in the future.
(The writer is head of credit card business, Paisabazaar)