Credit cards: Keep an eye on your card usage rate

With increasing digitization, the use of credit cards is growing and banks are offering attractive benefits such as cash back, discount coupons and reward points to attract new customers. Many people hold multiple credit cards, especially co-branded cards that offer rewards on the purchase of airline tickets, train tickets, fuel surcharge waivers, and more.

Use cards responsibly

While there are benefits to holding multiple cards, you should use them responsibly. Build a good credit history with a vanilla card, then add a few premium cards based on specific usage and purchases. Before opting for multiple cards, evaluate the need to select a particular card because it is pointless to hold two cards that offer similar benefits. If one is a frequent traveler, it makes sense to opt for a co-branded card. Or, if a credit card is frequently used at a particular point of sale, the point of sale’s co-branded card can be useful as it can earn additional loyalty points.

Payment on time

Credit cards offer a credit window of approximately five weeks from the day of the spend to the date of the billing cycle. During this particular period, credit card spending is like an interest-free loan and the total outstanding dues must be paid on time. The monthly payment must at least cover the minimum amount due, which is usually calculated as 5% of the outstanding balance, or the sum of all installments, interest/other bank charges and the amount used over the credit limit. Rollover of credit dues by only paying the minimum amount due is not a good idea because banks charge an interest rate of up to 45% per year for the rollover of dues.

Card usage rate

One should keep a tab on the Credit Utilization Ratio (CUR) which is simply the outstanding balance divided by the total credit limit. Let’s say if the credit limit is Rs 2 lakh and the cardholder has made purchases (including EMI) of Rs 50,000, then the cardholder’s CUR is 25%. A high CUR can impact your credit score and it should not exceed 40% for a longer period. Splitting spending on different cards could help reduce the rate of credit utilization for each card.

However, spending beyond one’s means will lead to financial hardship and a debt trap. Thus, one should use credit responsibly, pay on time and avoid late fees by keeping a monthly reminder on the phone or calendar for the due date. In the event of a financial crisis, it is better to turn to other sources of funds, such as a complementary loan or even a personal loan, because the rates will be lower than those charged by a credit card company.

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