Plastic money revolutionized the financial industry where by replacing the currency notes as the medium of transaction to a large extent. While about a decade back the cards were used by select Indians for select transactions, today these plastics have penetrated to a much wider populace and are getting used for almost all kinds of small or big purchases. Today people own multiple cards and use them extensively for buying air tickets to grocery. These are getting used from medical expenses to entertainment. While it is a blessing, but like every light has a darker area beneath it, this plastic money also has the potential to push one into financial stress; if not managed properly.
If you own multiple credit cards and use them regularly, you must ask the following basic question on their management. If you think you have a positive answer to any one of these, they sooner or later, you may land into debt trap.
Is your utilization close to prescribed credit limit?
If you are maxing out on the prescribed limit by the credit card companies, then you are on a wrong path. A higher spend on card while is not incorrect, after all this is a facility that has been extended to you, but having consistent outstanding close to the limit can be a dare. The limits are generally in multiples of the monthly income and hence you are exposing yourself to a higher amount than possibly you will be able to repay in one go. This can lead to mounting credit and eventually may lead to a situation where the outstanding goes beyond the capability to repay. This would especially be the case if you hold multiple cards and use them extensively.
Are you the one who spends to earn reward points?
All banks doll out a lot of attractive offers to its card customers. These offers are formulated with a view to have the card holders spend more. While these do give some benefits to the customers but in case you answer to the question is in yes, then the suggestion is to change the reason for card usage immediately.
The card has to be used for convenience topped up with some benefits that automatically come along with it and not the other way round.
Do you think you are saving money through that interest free period?
Another motivator for a lot of people to be spending more on cards is the interest free period. While there is no doubt that the credit free period is an advantage, but if one calculates the actual returns, the same may not be encouraging enough for one to actually count this as a gain. Say if a person spends Rs 50,000 on an average every month, he would be able to save just about Rs 2000 in interest over one year. The interest earned is nowhere close to the interest you would be required to pay in case you decide to pay in parts. The actual interest that you would make on through the interest free period would be about 4% as against a 36% interest getting charged on outstanding amount.
Do you think checking monthly statement is not required?
Not checking the monthly statement is not correct. While there are many who would state that each and every transaction that one undertakes gets notified through a message and email so what is the need. But what you need to understand is that there are fraudsters out there who can game any system. It is only prudent to be checking your monthly statement. An investment of a few minutes a month can save you in the long run.
Also, there may be an error in the charges that would have got levied on your account by the bank and you would be paying money that actually does not accrue to you.
Do you ensure that you are paying minimum amount due every month?
If your answer is yes to this question, then the suggestion is that you stop using your card immediately and do not use it again unless the same is completely clear of the debt. Paying minimum amount due attracts a heave interest and continued usage of card has potential to drive you to a situation where majority of your monthly amount paid towards outstanding is getting adjusted in the interest and other charges.
Be careful on the above points. Use your credit card since these are good instruments, but do not expose yourself to the associated perils else your CIBIL score calculation is at stake. It has all the potential to spiraling into a debt trap that can severely put you under stress.
So manage your credit cards well else you may be required to manage a lot.
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