CREDIT! or BORROWED MONEY- MISTAKES YOU SHOULD AVOID with A CREDIT CARD !

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Credit! This term in India has quite an image in the financial world. A lot has progressed over the years in terms of credit. From the entire process to various products, there has been quite a shift. Before taking credit was not considered a good thing, it used to reflect a financial imbalance. However, these days, it may have become unavoidable. But have you ever wondered, how is your creditworthiness judged? How do financial institutions decide if credit should at all be given to you or not?

A credit score is your new standard in the financial world. Simply put, it is a measure of an individual's ability to pay back the borrowed amount. It is the numerical representation of their creditworthiness. Credit scores are calculated by the credit bureaus in the country after taking into consideration several factors like the length of your credit history, repayment records, credit inquiries, and so on. Just understand that every financial account you open, every transaction you do, every credit you take, and every repayment or delay or missed payment you make, all has an impact on your credit score. Typically, a credit score is a 3-digit number that falls in the range of 300-900, 900 being the highest.

When you apply for a credit card or a loan from a bank or NBFC, having a higher credit score may hold you in good stead. You may get a loan easily, get a higher amount, have flexibility in loan tenure and even negotiate for a lower interest rate. All financial institutions have access to your credit score and even if you are inquiring /applying for a loan with one or multiple institutions, the same is fetched by all the lenders. Even this has a bearing on your credit score. A credit report without any negative history or blemishes is a must. Even one instance of default / non-repayment of any loan or instalment can have a serious bearing on your creditworthiness for years to come. This is the reason why we strongly recommend that you look forward to maintaining a very healthy credit score.

Credit has become a part of life and is now even available as an additional service or facility. Whenever you go to buy any appliance or do shopping online, you will often see options like, convert to EMI, pay in instalments or buy now and pay later. For many, it has become a custom to use these options to benefit from high convenience & additional incentives. Credit cards have become the must-have instruments for our spending. But, the boon of plastic money and ease of credit can turn into a bane in no time, leading to financial stress & reduced credit score. It's best to avoid credit cards just to keep a tight leash on your spending. But if you are able to do that otherwise, a credit card can be a good instrument to use.

Having said that, you have to ensure that your overall financial and credit card behaviour is not a drag on your credit score. Don't fall for the myths and mistakes that hamper your credibility. Here are some basic myths and mistakes that you can avoid to improve your creditworthiness, especially w.r.t. your credit card behaviour.

A] MISTAKE 1- ONLY PAYING THE MINIMUM DUE AMOUNT :-

    Credit cards have this very convenient feature that lets you pay only the minimum amount of expense on the bill due date. Now easy as it sounds, not paying the due amount is as good as a late or missed payment because you are charged a high-interest rate on the unpaid amount till you pay it off, leading to a debt pile you don't want. So, avoid believing the myths like paying the minimum credit amount is enough & keeping the due balance on your credit card improves your credit. In reality, they hurt your credit score and cost you money. You will have a higher credit utilization rate & lower credibility. Therefore, only spend the money you can afford to pay back on time & clear the entire due amount.

B] MISTAKE 2- MISSING PAYMENTS OR MAKING LATE PAYMENTS :-

    Many think that missing a few payments /EMIs on a loan /credit is not a big deal. However, missed payments or late payments can have a huge bearing. Whenever you miss a payment, interest is often chargeable on your unpaid balances. Also, the interest is levied daily and increases day by day, leading to snowballing. Additionally, it leaves a permanent negative entry on your credit report and lowers your credit score.( Credit report such as CIBIL and Experian are very important tools).

C] MISTAKE 3-  NOT VIEWING STATEMENTS PROPERLY :-

    One of the common ignorance of most of us is that we do not review our credit card statements and instead, blindly pay the entire amount. We miss paying attention to possible instances of fraud or errors. Sometimes the fraud or error amount is so small that people do not realize it until they arise repeatedly. We recommend reviewing all your loan and credit card statements carefully and regularly in order to avoid any possibility of error or fraud. Additionally, you will also have better clarity of your spending, the loan /credit transactions and the applicable interest rates and other costs.

D] MISTAKE 4- APPLYING FOR MULTIPLE CARDS/LOANS FROM DIFFERENT AGENCIES :-

    Each application has the potential to knock points off your credit score. Every time you apply for any sort of credit or even a credit card, the issuer will fetch your credit report from the credit bureau. Such report requests are hard enquires, and they reflect in your credit report. Therefore, if you make multiple applications with different entities in a short period, you appear to be a credit-hungry person, and lenders may start getting suspicious about your objectives. Such actions may even bring your credit score down a few notches. Research well before making any such sort of application and zero in on limited institutions.

E] MISTAKE 5-USING CREDIT CARDS TO TAKE CASH ADVANTAGES :-

    Taking out cash withdrawal is the costliest thing you can do with your credit card. It may seem convenient, but it comes at a hefty price. Every time you withdraw cash through your credit card, a high cash advance fee of 2.5%-3.5% applies to the withdrawn amount. In addition, finance charges are also charged right from the day of withdrawal till the date of repayment. Therefore, always keep this option as your last resort and use it in an unavoidable emergency.

F] MISTAKE 6- NOT MAINTAINING CREDIT UTILISATION RATIO:-

The credit utilization ratio is the proportion of the total credit limit utilized by you from your credit card. Not handling this ratio or keeping it high, raises concerns to the credit bureau that can hurt your credibility. Usually, credit utilization over 30-40% is cautious, and experts suggest keeping this ratio under 30%. If you cannot maintain this ratio, try to maintain at least 20% of your total credit limit free, and do not ever max out your credit, as this can lower your credit score.

G] LETTING YOUR CREDIT CARD GET CHARGED OFF:-

A charge-off is the most harmful thing which can happen to your credit score. When your credit gets charged off, it states that your account has gone into default, and if it stays unpaid for more than six months, the lender may sell it to a collection agency to recover the debt. The charge-off remains on your credit report for seven years and can significantly impact your future financial dealings. So, if you have a delinquent account, get it active before it hurts your credit score.

H] NOT CLOSING THE CREDIT CARD in FORMAL TERMS:-

If you would like to chuck off the credit card after paying all dues for any reasons- Close the credit card in formal terms through proper communication with the service provider or else this could reflect in the Credit Bureau status against individual's PAN.

To summarise, having loans or using credit cards is not necessarily bad. However, it all depends on how best you manage your dealings keeping in mind that this will be recorded and referred to by every financial institution in future. Having good credit behaviour can go a long way in not negatively affecting your credit scores and hurting your pockets. By avoiding these common myths & mistakes, you will be able to take advantage of the benefits of having credit & credit cards.

😊Hope you enjoyed or appreciated reading this one. Thank You, keep safe & Be Empowered... 😊
This blog “Finmission’s Class" is an effort to educate and spread the word of financial knowledge and awareness whilst empowering the community with a touch of practicality on personal finance.
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