Borrowings: Swiping Your Credit Card? Think Twice

The advent of Covid - 19 has made credit cards one of the most preferred modes of digital payments. The increased use of credit cards indicates the consumer demand for convenient financing options. Nowadays, many lenders carry out the credit issuance process digitally with video verification to speed up the know-your-customer(KYC) procedure. Your debt-to-income ratio will determine the approval of credit cards. 

The credit card to debit card ratio is an important factor in the increased acceptance of credit cards. In January of this year, it increased to 7.5% from 6.9% last year. According to an analysis done by Axis securities, the credit card to debit card spending ratio has increased to 1.5x in January this year from 1x last year. The rise in card spending is the major reason for discretionary buying, a pick-up in domestic travel, and incremental international travel.

A credit card is always a secured and convenient mode of payment. But using a credit card for reckless purchases, making late payments, and rolling over the credit can lead to debt traps. Long delays in payments and unpaid dues will impact your credit score and lenders may not be prepared to offer education or a vehicle or even a home loan.

To avoid getting caught in a credit card debt trap, here are 5 factors to be considered before swiping your credit card. 

• Avail of Low-cost credit cards
  

Look for a credit card featuring a low-interest rate and no or low annual charges. Credit card issuers impose charges like cash advance fees, ECS/cheque bounce charges, late payment fees, and statement requests for more than three months. Experts say that cashback on credit cards can attract cardholders to spend beyond limits, later it can result in a debt trap if the individual is unable to pay the outstanding dues at the correct time.

• Use card rationally

The credit card issuer will decide and set a credit limit at the time of issuing the credit cards. 

Ideally, you can utilize credit cards to meet emergency needs and for fixed or recurring monthly expenditures. Most banks offer a credit window of 4-5 weeks from the day of spending to the date of the billing. During this period, spending made on credit cards is like an interest-free loan, provided you repay the amount before the due date. Ideally, you should pay all the outstanding amounts. In case you face a cash crunch, then you can pay more than the minimum amount due, which is computed as 5% of the balance outstanding, or the sum of all installments, interest charges, other bank charges, and the amount used over the credit limit. 

3. Avoid rolling over credit

Rolling over a credit on a credit card is more expensive than repaying a personal loan. The lender can levy an interest rate of 3-4 percent monthly on outstanding dues rolled over and the interest is charged by the lender on a daily credit card balance. So, if you decide to roll over the credit, do not use the same card to make transactions until you pay all the outstanding due. 

the lender will charge interest for all transactions during that period, which will compound the outstanding dues and trap you in debt. The existing card user should transfer the outstanding debt from a high-interest rate to a low-interest credit card. This aids to reduce the outgoing interest money and save you from the debt trap. 

4. Defaulted payments impact your credit score

If you fail to pay your credit card bill before due, your credit score may be impacted. 

It is advisable to convert your outstanding dues into equated monthly installments (EMI) to regularize the payments. If not you can opt for a personal loan to clear off your unpaid credit card dues. It is better to avoid any debt settlements with the lender as it will impact your credit score.

5. Living on credit

It is better to opt for a credit card that has a low-interest rate & nil or low annual charges. You can use a credit card to pay your emergency needs or for fixed or recurring expenditures. If you are rolling over the credit card, try not to make payments using the same card until you clear off your outstanding debt. If you are not able to pay the outstanding due, transfer the amount into EMIs to regularize payments.

Conclusion

A credit card is the best and most convenient way to access credit. It is up to you whether you utilize it productively or get caught in a debt trap in case of improper usage of credit cards. It is always advisable not to make late payments, reckless credit card purchases, and roll over the credit to avoid a debt trap and to save your credit card. Follow the above-listed factors to avoid the debt trap and balance your credit score.