5 Common Credit Card Mistakes to Avoid

Many credit card users think that missing a few payments on a credit card is not a big deal. However, missed payments or even a late payment can lead to a huge debt. This is because whenever you miss a payment, interest charges are levied on your unpaid balances. The important point to note is that credit card interest rates are the highest, ranging from 2% to 3.5% per month, or higher. Also, the interest is levied on a daily basis and hence increases day by day, leading to huge debt. That’s why it is necessary to pay your credit card bills in full and on time.

Credit card providers calculate the interest on the due amount using the below-given formula.

(Number of days from the date of purchase till payment is made) x (Full outstanding amount) x (Interest rate percentage p.a./365)

Let us understand how much interest you will have to pay in case of late payment or missed payments, with the help of an example:

Case 1: Partial Payment before the due date

In case of partial payment, the cardholder will incur the interest in the following manner:

Total Interest = (Interest on full amount from the date of purchase till partial payment date) + (Interest on the remaining amount from partial payment date till next statement generation Date)

Interest on full amount from purchase date till partial payment date (Between 2 July and 22 July) = Rs. 1208.21 [21*50000*42%/365]

Interest levied for 16 days (23 July to 7 August) on remaining amount Rs. 45,000 = Rs. 828.49 [16*45000*42%/365]

Total interest charged = 828.49 + 1208.21 = Rs. 2036.7

Total amount that needs to be paid = Rs. 52,036.7

Case 2: Partial Payment after the due date

In this case, the customer may incur late payment charges along with a credit card interest rate. The interest rate that the customer will be liable to pay is calculated below:

Interest for 28 days (Between 2 July & 29 July) = Rs. 1610.95 [28*50000*42%/365]

Interest for 9 days after partial payment date & till next statement generation date = Rs. 466.02 [9*45000*42%/365]

Total interest charged = 466.02+1610.95 = Rs. 2076.97

Total amount that needs to be paid= Rs. 52,076.97

It is very important to understand that the interest amount will keep on adding till the day you make full payment of your credit card bill. If you continue to miss payments on your credit card as well as make new purchases, you may fall into a major debt trap. Hence, it is very important to pay your credit card bills in full and on time.

To avoid being late, you can set a calendar reminder so that you don’t miss out on the due dates. You can also set up an automatic payment via your bank ensuring that the date and time are taken into account.

Also read: Best Low-interest Credit Cards in India

Credit card issuers make it convenient to repay your balance by allowing minimum payments. However, it is not advisable to only pay the minimum due. Paying the minimum amount and revolving the balance to the next cycle can equally damage your finances as any missed or late payment. This is because interest is levied on the unpaid balance and even when you pay only the minimum amount, the interest charges will be levied on the remaining balance.

Also, when you have an unpaid balance left, any new transactions that you make on your card will also attract interest charges from the very first day. Hence, it is always advisable to pay your credit card dues in full and on time. If however, you cannot afford to pay the total due, you should try and pay off as much balance as you can.

Taking out a cash advance happens to be one of the costliest things you can do with your credit card. It may look like the most convenient way of getting some cash at your disposal, but it is also the most expensive one. As soon as you withdraw the cash, the interest starts accruing on the amount withdrawn. Also, cash advances on credit cards attract an additional fee. Some banks charge a flat amount while others charge it as a percentage of the amount withdrawn. For example, the cash advance fee on HDFC Regalia is 2.5% of the transaction amount,

It is important to know that in cash advances (just like in case of missed payments), the interest-free period becomes void and on your new purchases you will have to bear the interest costs from the day of purchase. This significantly adds to your debt. Also, you will have to pay a one-time cash advance fee which is usually charged as a percentage of the amount withdrawn or a flat maximum fee, whichever is higher.

Using the majority or even all of your available credit limit is not considered a good idea. When you do this, your credit utilization ratio becomes very high which might lower your credit score. Credit experts advise maintaining a utilization ratio of 30% or below. But if you cannot maintain this ratio, try and keep at least 20% of your total credit limit free. This not only helps you in maintaining a good credit score but also ensures credit availability during emergencies.

If you are at the verge of exceeding your credit limit, try paying in cash for the subsequent expenditures. If in case you tend to often break the limit, either request the card issuer to increase your limit or get an additional credit card to increase the total credit limit.

Getting a credit card without being aware of the terms and conditions associated with it is a very common mistake people tend to make. Suppose you are not someone who frequently travels, then choosing a credit card that is primarily focused on providing travel benefits, is not preferable for you. In such a situation, you will neither be able to avail the benefits of the card nor will the card be able to fulfill your requirements.

For example, if you are someone who is looking for a cashback credit card, then Axis Ace would be a preferable choice for you. Similarly, if you are a frequent online shopper, then Flipkart Axis Credit Card or Amazon Pay ICICI Credit Card would be great choices for you. So, always analyze your spending pattern before applying for a credit card and choose a credit card that fulfills your requirements the best.

In order to avail the maximum of benefits, it is important for you to know about your credit card. A part of which includes knowing about all the possible credit card mistakes one tends to make. Once you get the card that is best suited for your needs, you need to develop good credit card habits and use your card with utmost responsibility. By following certain precautions and by avoiding these credit card mistakes, you will be able to enjoy the benefits and stay free from exhausting interests, additional charges, and a bad credit score.