Credit cards have become an integral part of our lives. They have a 45-day interest-free period. When used intelligently, they can help you better manage your spending. In fact, one can earn points by spending with credit cards that can be used for other purchases.
But if it’s not used wisely, a credit card can lure you into a debt trap. Interest on credit cards can be as high as 3.5% per month, which is 42% per year.
“Treating credit cards as an asset is a big mistake. It is not “free money”. What you spend today, you have to pay it back tomorrow, ”says Arijit Sen, Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.
Once you have incurred credit card debt, it is very difficult to get out of it. Let’s take a look at some of the common mistakes that will lead you to credit card debt.
Pay the minimum amount due
The problem starts when you spend money that you don’t have. Plus, when the credit card’s due date comes, you don’t have enough money in your account to pay the bill. Credit cards will give you the option of paying a minimum amount on the payment for which you are exempt from paying your late fees and can continue to use the credit card.
“Repaying the minimum amount owed repeatedly is a big mistake. It is a misconception that paying only the minimum amount owed does not incur interest charges on the unpaid amount, ”Sen said.
Here is what is going on. Credit cards charge you the high interest rates mentioned above on the unpaid portion of your bill. Also, once you have an outstanding amount, the interest-free period is revoked on all other transactions you make, until you make the payment. So when you use your credit card again, you start paying interest from day one.
Not paying your credit card bills in full for months and additional credit card spending can get you into a serious debt trap.
You can convert those debts to IMEs and pay lower interest, but that means you are entering a debt repayment cycle that can last for several years.
So it is a mistake to swipe your credit card and pay for items that you cannot pay for at this time with cash or debit card.
Use your credit card to withdraw money from an ATM
If financial errors could be ranked in order of their severity, using your credit card at an ATM to withdraw money would have priority. Remember that there is no interest free period for such withdrawals and the high interest rate kicks off immediately. In addition, you will have to pay a 3.5 percent cash advance fee. You continue to pay interest charges until you have paid off the full amount.
Always plan your credit card purchases and spend them only on things you would have spent anyway. Sen has a word of warning, especially since the holiday season is upon us. “A lot of times people don’t budget for groceries / purchases, especially during the holiday season. Carrying credit cards during unforeseen purchases / purchases is a typical mistake. This will create unnecessary pressure on cash flow in the following months. “