How to avoid credit card traps

Rohan Kapoor is a 25-year-old marketing professional living in New Delhi. He recently discovered the convenience of owning a credit card and the ease with which he can meet unexpected expenses. He went on a spending spree, buying 2-3 electronic appliances on the trot in a month with his credit card. As he did not have enough funds, he decided to pay the minimum amount per month thinking it would help him temporarily settle issues with the credit card issuer. This was until he realised that unwise and unplanned rolling over of credit had worsened his credit card debts.

If he continues to roll over credit, the total outstanding amount may just snowball into a huge figure and land him in a debt trap.

He could probably have gone in for the option of paying his credit card dues by converting the outstanding amount into convenient EMIs.

However, EMI schemes require a careful reading of the fine print.

Zero interest rate

One, even a zero interest rate option may have a catch. Banks may levy an additional charge for processing or documentation. Besides, the EMI option isn’t available for every purchase you make. Sometimes this option is available only on certain products at select outlets. So you need to be careful and do your homework well before going in for this route. Also, if you default on the monthly instalment, the bank may then levy penalty charges and may just convert the remaining balance into normal credit card dues. Finally, during the tenure of your EMI payments, the pre-approved credit limit on your card is reduced to the extent of the outstanding amount. If you continue to pay your EMIs on time, the amount is released.

Preventive steps

Considering the disadvantages associated with the roll over and the EMI option, here are some preventive steps you should take:

Pay your credit card balance on time. Paying off credit card dues in full every month is the best way to avoid credit card debt. Lower the balance, the better your credit score.

Read the fine print when you buy a credit card. Know all details about the interest rates being applied, duration of the grace period being offered, and any fees being charged. Many people are unaware of the fact that interest rates can be negotiated, so do a thorough research when you apply for a credit card.

Do not purchase too many credit cards. If you have made applications for credit cards, this will reflect in the ‘Enquiry’ section of your credit report and will negatively impact your credit score as this credit behaviour indicates that you are ‘Credit Hungry’ and implies that you are constantly looking for credit.

Set an alert on your credit card transactions. This is a useful way to keep an eye on the usage and spending. Most of the credit card providers will be happy to alert you on credit card payment dates through SMS and email, if you subscribe for it.

Be credit wise. Develop a plan which monitors your spending activity. This will help you be more aware of your personal finances and help you manage them better. This will ensure you do not lag behind in your monthly card payments.

Build your credit score. A good credit score can be built and improved by making regular payments on credit card bills. Regular payments show a healthy credit history and helps in winning lender’s confidence in your creditworthiness.

(The writer is Senior Vice-President – Consumer Relations, CIBIL)

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