Borrowings: Four credit card risks to guard against

Credit cards are a type of short-term loan where you do not have to pay any interest if you clear all your dues on time. However, like any other type of borrowing, these carry certain risks if you are irresponsible in using them. Here are the major risks associated with credit card usage and how to avoid them.

Risk 1: High interest charges

Credit cards are one of the costliest forms of borrowing as these charge the highest interest rate, ranging from 22% pa to 49% pa However, the interest is applicable only in case of non-payment of the dues in full and on cash withdrawal. When you do not pay the total amount due, new transactions also start attracting interest charges from the first day, which means the interest-free period becomes ineligible.

How to avoid it?

Always pay the total amount due on your card on or before the due date. “If you can’t make the full payment, try to convert the dues into EMIs and pay them off in smaller installments over a few months. If that is not possible, you can also take a personal loan or avail the balance transfer facility, ”says Sachin Vasudeva, director & head of credit cards business, Paisabazaar.

Risk 2: Overspending

Credit cards give additional purchasing power, which can easily lead to overspending, especially for someone who tends to splurge. Cards give reward points, cashback, and discounts with popular brands, which can encourage people to make unnecessary purchases. This can result in spending more than you can afford to repay.

How to avoid it?

The only way to avoid overspending is to practice strict financial discipline. Check all your credit card statements regularly, see where you are spending the most and what can be avoided. Keep track of the billing cycles of each of your cards to make the most of the interest-free period.

Risk 3: Negative impact on credit score

Your credit card payment records are also shared with the credit bureaus. Late payment or missed payments and defaults on any of your credit cards will lead to lower credit score. Secondly, maxing out your credit cards means that you are over-reliant on credit and, as a result, credit bureaus may lower your credit score if you regularly max out your cards.

How to avoid it?

If used wisely, credit cards will only improve your credit score. “The best way to do this is to always pay your bills in full by the due date. If you frequently miss the due date, it may be better to set standing instructions for payment or set due date reminders for each of your cards. Moreover, you should avoid maxing out your credit cards, ”suggests Vasudeva.

Risk 4: Fraudulent transactions

Fraudsters may get hold of your credit card details through fraudulent emails or phone calls and make transactions through the card. They may also commit fraud by duplicating your card (skimming) at point-of-sale (POS) terminals.

How to avoid it?

You can avoid credit card fraud by staying vigilant and using your card securely. Never share sensitive card details with others. When making a purchase at a POS terminal, make sure the card is swiped in front of you. Check your credit card statements and credit reports periodically to detect fraudulent transactions or identity thefts.

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