Swipe smart: common credit card mistakes that can cost you dearly

With the festive season bringing attractive shopping offers, discounts and reward points, credit card spending tends to rise. While cards offer convenience and flexibility, careless usage can leave you with hefty bills, high-interest debt and a dent in your credit score. From paying only the minimum amount due to chasing reward points and overlooking hidden charges, here are some common mistakes to avoid while using your credit card.

Paying only the minimum amount due

If you have taken a credit card to tide over a cash crunch, you may have noticed that banks offer the option of paying a 'minimum amount due'. It is usually around 5% of the total outstanding amount and effectively puts you on a high-interest loan.

Let's understand this with an example. Suppose you have a credit card outstanding of ₹1 lakh. The minimum amount due in the first month is ₹5,000, or 5% of the total outstanding. Assume the card issuer charges interest at 3.5% per month (42% annually). After paying ₹5,000, your unpaid balance is ₹95,000. Interest at 3.5% on this amount works out to ₹3,325, taking the outstanding balance to ₹98,325 at the beginning of the next month.

In the second month, the minimum amount due falls to ₹4,916. After this payment, the balance is ₹93,409. Interest at 3.5% works out to ₹3,269, taking the closing outstanding to ₹96,678. This is despite having paid nearly ₹10,000 over two months. The calculation assumes no fresh purchases or additional charges. If you continue making fresh purchases, those amounts will also add to your outstanding balance.

The accumulation of interest, coupled with the slow reduction in principal, can stretch repayment over several years. Therefore, avoid treating the minimum amount due as a regular repayment option.

So, what is the purpose of this facility? It acts as a safety net during a temporary cash crunch. Paying at least the minimum amount due by the deadline generally helps avoid late-payment charges and the account being reported as overdue. Use it only when you expect to clear the remaining balance shortly. Remember, interest continues to accrue on the unpaid amount.

ATM withdrawals using a credit card

Credit cards allow you to withdraw cash from ATMs, but this facility works differently from using your card to make purchases. Banks levy a cash advance fee and charge interest from the very date of withdrawal, unlike regular credit card purchases, which typically come with an interest-free period.

You should also know that banks set a separate cash advance limit, which is generally a smaller portion of the overall credit limit, often around 20-40%. Avoid using this facility to meet regular cash requirements. Even a small withdrawal can turn out to be expensive because of the upfront cash advance fee and high interest charges.

Chasing reward points through unnecessary spending

Credit cards offer cashback, reward points, air miles and vouchers on purchases. These rewards can be redeemed for flight tickets, hotel stays and other products. However, focusing excessively on accumulating reward points can lead to unnecessary spending. You may end up choosing a more expensive product or restaurant simply because your credit card offers additional rewards on that purchase.

This can hurt your financial planning. The value of rewards earned may be much lower than the additional amount spent. For instance, a 5% reward on a ₹10,000 purchase is not a saving if you did not need the product in the first place. Further, if you fail to pay the bill in full, the interest cost can easily outweigh the value of rewards earned.

You should also understand the redemption rules. Reward points may come with expiry dates, minimum redemption thresholds or restricted redemption categories. Some cards offer attractive reward points only on selected spending categories, while excluding rent, utility payments, fuel or insurance premiums.

You may accumulate points for years without realising that the value is limited or that they are about to expire. Calculate the actual monetary value of the rewards and check the redemption conditions rather than focusing only on the number of points accumulated.

Spending up to the credit limit

Just because a bank offers you a credit limit of ₹3 lakh does not mean you should spend the entire amount. High credit utilisation can adversely affect your credit score. For instance, if you have a credit limit of ₹2 lakh and spend ₹1.5 lakh, your credit utilisation ratio is 75%.

Experts generally advise keeping credit utilisation below 30%. A consistently high ratio may signal credit dependence to lenders, even if you pay your bills in full and on time. This could affect your credit profile when you apply for essential loans such as a home loan or car loan. Lenders may view high utilisation as a sign of financial stress, although it does not automatically mean your loan application will be rejected or that you will be charged a higher interest rate.

Missing payment deadlines and overlooking charges

Even a short delay in paying your credit card bill can attract late-payment charges and interest. Be mindful of it. Also, pay attention to annual and renewal fees. Some cards waive these charges if you meet a specified annual spending threshold, while others levy them irrespective of usage. Evaluate whether the benefits you actually use justify the fee rather than continuing with a card simply because you have held it for years.

Equally important is checking your credit card statement every month. Many people pay their bills without reviewing individual transactions. This can result in unnoticed subscriptions, duplicate charges, incorrect billing, unauthorised transactions or fees.

Ignoring foreign currency markup

When travelling abroad or shopping on international websites, customers may use their regular credit cards without checking the foreign currency markup. Many cards charge a markup of around 2-3.5%, apart from applicable taxes.

Suppose you are travelling to the US and use your Indian credit card to make a purchase worth $1,000. Assuming an exchange rate of ₹85 per dollar, the purchase translates to ₹85,000. If your card charges a foreign currency markup of 3.5%, you will pay an additional ₹2,975, plus 18% GST of ₹536 on the markup. This takes your total bill to ₹88,511, or ₹3,511 more than the converted purchase value.

A seemingly small markup can add significantly to the cost of international transactions. Check whether your card offers zero or low forex markup before using it abroad. Also, choose to pay in the local currency rather than opting for dynamic currency conversion, under which the merchant converts the transaction into rupees. This conversion may involve an additional markup and can make the transaction more expensive.

A credit card should be a payment tool, not a means to borrow beyond your repayment capacity. Pay your bills in full and on time, understand the charges and use rewards only when they genuinely add value.