7 Ways You Could Be Hurting Your Credit Card Utilisation

If used responsibly, credit cards can be your best friend. From helping you overcome financial challenges and helping you build a strong credit history to ease your financial burden and benefit you with several rewards – credit cards can do a lot for you. But the key phrase here is: ‘if used responsibly.’ Because if it isn’t, it can quickly start hurting your credit score and land you in a debt trap. Disciplined credit card utilisation and regular payment dues can help you grab all the benefits of using a credit card.

Here are seven mistakes you should watch out for to maintain good credit card utilisation

1. Missing Payment Deadlines

Missing payment deadlines by more than 60 or 90 days will attract a late payment charge, leading to a lower credit score and a higher credit card utilisation ratio. To avoid this, make sure you don’t use credit more than your ability to repay them on time. You can also enable the auto-pay debit feature, which helps you to stick to your payment schedule.

ALSO READ: Impact of Missing Credit Card Payment

2. Always Paying the Minimum Amount Due

When your outstanding debt is due, the bank or credit card issuer allows you to pay the minimum amount on your credit card. This primarily helps to defer the debt and interest payments. However, the balance debt will continue to accrue interest, typically between 30% and 40%. This habit of continuously rolling over debt to the next cycle can quickly lead to financial debt. Moreover, non-payment of credit card dues can lead to withdrawal of interest-free periods on fresh transactions. Rather, consider options like conversion of your outstanding debt to EMIs or credit card balance transfers.

3. Ignoring Rewards Expiry Date

Credit cards offer extensive reward points, which can be used or redeemed on certain purchases. You can use these accumulated reward points to shop, buy gift vouchers, and avail yourself of travel offers. However, reward points also come with an expiry date. It is always advisable to watch out for these dates, validity, and terms and conditions linked to your reward points. For instance, One Credit Card offers an exciting rewards program where you receive a Reward Point for every spend, which can be redeemed at 10% value without any expiry date.

4. Making Cash Withdrawals Through Credit Card

Cash withdrawals through your credit card should be your last resort as they attract heavy financial charges and affect your credit card utilisation limit. Cash advance fees as high as 3% of the withdrawn amount and interest charges ranging around 2% to 4% monthly are levied right from the moment of withdrawal. If you do this frequently, these two charges can burn a hole in your pocket. If unavoidable, repay the withdrawn amount as early as possible to minimise the effect of associated charges.

5. Overutilising Your Credit Utilisation Ratio

The Credit Utilisation Ratio is the ratio between the total credit limit available on your credit card and the actual credit limit used. If you constantly avail yourself of the credit limit, it will lead to over-utilisation of the credit card limit and damage your credit score. Generally, financial experts suggest keeping a low credit card utilisation ratio to maintain a good credit score. If you tend to breach this mark often, consider asking your credit card issuer to extend your credit limit, which will reduce your credit utilisation ratio, provided you keep your spending low enough.

6. Failing to Make the Most of Your Interest Period

Interest-free periods are the duration between the credit card utilisation date and repayment. Generally, banks or credit card issuers offer 20 to 50 days as a grace period. You won’t attract additional interest charges if you pay your dues promptly (within the interest-free period). Plan your big-ticket purchases around this grace period to maximise the benefits of the facility.

7. Turning Down Credit Limit Increase Offers

Many credit card issuers offer an increase in the credit card utilisation limit. Credit card holders often turn this offer down due to the fear of overspending and getting caught in a debt trap. Instead, using this limit wisely can help you manage your finances better. An increase in credit limit will lower your credit utilisation ratio and improve your credit score. Therefore, consider an offer for a credit limit increase, as it will also increase your chances for getting bigger loans.

Credit cards can be a bane or a boon in your financial journey – it all depends on your usage. It can come to your rescue in difficult financial moments as well as help you ease your financial burden. However, irresponsible credit card utilisation can damage your credit profile severely. It is important to use your credit card diligently and inculcate healthy spending habits.