Five Golden Rules for Credit Card Usage

If used responsibly, credit cards can be a fantastic convenience tool. Not only do they extend you what is in effect an ‘interest free’ loan for a full month; they also provide you with the convenience of electronic purchases followed by lump sum settlements. Having said that, credit card related horror stories are commonplace too, and so it becomes imperative to follow a few golden rules when it comes to their usage. Here are five of the most important ones.

Keep your utilisation percentage well below your limit

In an effort to keep their spending in check, many credit card users deliberately restrict their spending limits. While this may help enforce a certain degree of fiscal prudence, its harmful in the long run as the average ‘percentage of limit utilisation’ is a key component in the build out of your credit score. Instead, keep your card limit at a fairly high figure but enforce self-discipline to the extent that you never utilise more than 40-50% of your limit in any given month.

Own two or three cards… but no more

Rather than having just one credit card, aim for two (or three at most). One Visa, one Mastercard and one American Express card should work just fine. Make sure you spread out your monthly purchase across these cards. Once again, this will minimize your ‘per card’ limit utilisation and also further increase your ‘number of loan accounts’ that you use – another factor that can help you build out a solid credit score (assuming you use the cards responsibly, of course!)

Never finance purchases using your card (unless it’s a short, zero cost EMI)

It’s tempting to avail those “insta loans” that your card offers, and also finance large purchases on your card and break them into EMI’s. This is something you should be avoiding at all costs, because these loans tend to be costlier than even personal loans, and could also derail your personal finances over the long run through the creeping up of overleverage. Unless you’re buying something small and breaking it into a short (< 6 month), zero cost EMI, avoid borrowing on your card beyond the standard 1-month cycle.

Pay off your (full) bills well in time

This might sound like a no-brainer, but you absolutely must pay off your entire credit card bill before the due date each month. Do not fall into the trap of paying off the ‘minimum’ amount and revolving the rest. The interest costs associated with this habit can be exorbitant (to the tune of 40% per annum), and can even impar your ability to meet your day to day expenses over time. Not to mention that doing this can severely damage your credit score, and so you may be denied access to liquidity in a real emergency situation.

Remember the golden rule: credit isn’t cash!

Many people spend on their cards carelessly, with the assumption that their credit limits are as good as cash in the bank. However, remember that a 3-lakh credit limit isn’t equal to having 3 lakhs in the bank! Use your cards responsibly, and only spend what you can afford to pay off by the next due date. If you cannot, simply delay your purchases or start saving for them in advance. The fruits of patience are sweet!