Defaulting on credit card bills has become a very common and big problem in recent times. The biggest reason for this is probably the fact that it is easy to go overboard while spending with credit cards. There is, of course, a credit limit on each credit card that is set as per your monthly earnings, but usually, the credit limit is such that you can have difficulty paying it off with your monthly salary.
Even after learning this, it is quite difficult to avoid the attraction of using credit cards since they offer the freedom to carry cash around. Another big factor that contributes to the attraction of credit cards is that they are widely available. Anyone and everyone can get their hands on credit cards offered by some company.
Regardless of how much the credit card industry suffers due to the increasing number of defaulters every year, you, too, would have to face the consequences of defaulting on your credit card bills. Your credit rating report would be hampered, making it difficult for you to get any loans in the future. Hence, it is advised that you try and avoid using credit cards as much as possible.
Risks Associated With Credit Cards
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The following are the core risks associated with credit cards and ways of avoiding them.
High Interest Rates
Credit cards are probably the most expensive sources of credit, as they frequently offer relatively high interest rates, between 30 % and 52 % per annum. However, interest is accrued only in case the full amount due cannot be paid or no cash withdrawal is performed. If the aggregate sum remains unpaid, then new transactions begin accruing interest without any interest-free period.
While some consumers accrue interest based on these factors, perhaps one of the most expensive—yet often untrue—assumptions that most cardholders make is that making only the ‘minimum amount due’ is enough.
In fact, merely paying the minimum payment avoids late penalties but can also lead to an accumulation of interest that actually accrues on that balance and all new purchases that far more than offset any savings over late fees.
Many people might fall into these situations when they are suffering due to some or other trouble of being financially distressed. On the other hand, most people holding cards believe that paying only the ‘minimum amount due’ will suffice. The truth is that paying only minimum recharges will avoid late charge payments and interest earned on the principal and new purchases will be many times more than the money saved to avoid late charges.
How to proceed?
Thus, the firm highly suggests paying off a credit card the entire amount charged before its due date. But if you cannot pay in full, you will be allowed to convert the outstanding amount to equated monthly installments, which can be paid off for several months.
Alternatively, asking for a personal loan or using the balance transfer facility may be a cheaper option than opting for finance charges. More importantly, one should avoid cash advances; the latter type of transaction, respectively, accrues interest charges from day one.
Over-spending
From a psychological angle, credit cards allow you to spend much more than your actual capability, and if you are impulsive, you will spend a lot more money. Now, come to the reward points, cash back, and discounts by famous brands—these things to lure customers may motivate you to make unnecessary purchases. These acts may then result in excess expenditure more than what you can return.
What should you do?
You must maintain strict financial discipline. You review all the credit card statements regularly to find out the areas where you mainly spend and what can be curtailed. Monitor the billing cycles of each card to ensure that you pick the maximum benefits from the interest-free period. Do not carry credit cards with you if you are unable to resist the temptation of overspending. Use alternate modes of payment like mobile wallets or cash in order to avoid unauthorized spending.
Fraudulent Transactions
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This is how scam artists usually obtain your credit card details: via fake e-mails or telephone calls that use the card to make unauthorized purchases. In addition, they may skim clone cards from point-of-sale terminals. Others will even engage in identity theft; they get a credit card in your name and with your PAN.
What should you do?
Be very careful and responsibly use your card so as to minimize the risk of credit card fraud. Never reveal any information regarding your card to any third party. Always see that your card is swiped when you do a transaction at a point-of-sale terminal, and never give anyone your card. Regularly check your credit card statements and ask for your credit reports so that you are informed if some unlawful transactions have been done or if someone has stolen your identity. If you find some errors, you should report them to your card issuer or the credit bureau right away.
It damages your credit score
All credit card payments are reported to the credit bureaus. Incidents like late or missed payments, as well as default on any credit card, cause a drop in your credit score. In addition, frequent credit limit attainment is a sign of high dependence on credit, which once again forces the credit bureaus to act by reducing your score.
What should you do?
Credit cards should be used responsibly; otherwise, they can be a positive factor for your credit score. Pay all the bills in full within due dates. If you rarely remember their due dates, set automatic payment instructions or reminders for each card.
Do not have maxed-out credit cards. If you cannot sustain a low utilization ratio for a long time, you might have to apply for another credit card or ask to raise the limit of your current card. So, do not apply for multiple credit cards in a single application. Sometimes, this may negatively impact your credit score, too. Evaluate your eligibility, and if it fits your requirements, then apply for it.
Tips to Overcome the Attraction of Credit Cards
Here are a few tips to help you overcome the attraction of using credit cards. This will help you avoid defaulting and keep your credit rating report clean.
- If you are the sole earning member of your family, you should also be the sole credit card holder of the family. If you have to give a credit card to a family member, make sure the limits of both your card and the other card are well within your reach.
- If your shopping bill is low and you are carrying that much cash with you, forget about your credit card momentarily. Paying such small amounts with a credit card may seem insignificant at the moment, but the amounts, when added at the end of the month, could snowball into something huge.
- If your account has enough money but you are not willing to carry cash, try paying with your debit card whenever possible. Debit cards are nothing but ATM cards that you use to get money from ATMs. Some kinds of ATM cards can be used directly for shopping, and if you are attracted to cards, apply for such ATM cards instead of credit cards.
If you follow the above steps, you can avoid the trap of defaulting on credit cards and keep yourself off the defaulters list. Personal finance management is an art that requires only a little thinking.
Conclusion
You should opt for the credit card that best suits your lifestyle and allows you to get maximum value from frequent purchases. You need to look for the best reward and best offer available at a low cost rather than settling for a card that offers the highest introductory bonus or has you on its pre-approved list.