The festive season brings with it the wave of increase in consumer spending, given that most households wait for festivities to begin for making new purchases. This uptick in festive spending also witnesses spike in credit card usage, given the large pool of benefits and discounts they offer. However, while attempting to maximise the benefits of credit cards, make sure you avoid making these mistakes which can hurt your financial health this festive season:
Spending more than what you can repay
The common perception that festive season is an auspicious time to make new purchases, coupled with various lucrative offers and discounts on credit card purchases can sometimes result in overspending. When consumers spend more than what they can repay, they tend to repay just the minimum due amount, which is usually 5 percent of the total outstanding amount. Although this saves them from paying any late payment fee, the rest of the outstanding bill amount continues to accrue interest in the form of finance charges, which can be as high as 47-48 percent p.a.
In case you find yourself in a situation where you are unable to clear the dues in entirety on or before the due date, consider converting the outstanding amount, especially big-ticket purchases, into EMIs.
Using a credit card for cash withdrawal
Whenever you withdraw cash through your credit card, a cash advance fee of up to 2.5 percent-3.5 percent of the withdrawn amount is charged. Unlike other transactions initiated through your credit card, cash withdrawals also attract finance charges right from the day of such withdrawal till the date of repayment. Hence, cash advance fee, coupled with the high finance charges of up to 47-48 percent p.a. are capable of burning a hole in your pocket, especially when cash withdrawals from credit card are done on a frequent basis.
Instead of cash withdrawal via credit card, consider fulfilling your fund requirement by opting for loans which involve quick disbursals, such as loan against a credit card, gold loan, loan against securities or personal loan. These involve lower interest cost compared to the hefty finance charges and cash advance fee levied on credit card’s cash withdrawals. In case doing cash withdrawal via credit card becomes totally unavoidable, make sure you repay the entire amount as soon as you can.
Failure to factor in repayment capacity while selecting EMI tenure
EMI on credit cards is usually offered for tenures ranging anywhere between 3 months to 36 months. While selecting EMI tenure, it's important to factor in your repayment capacity in order to reduce the chances of defaulting on repayment of your outstanding dues in future. Those who have a higher repayment capacity can opt for shorter tenures to save on overall interest cost, but remember that as shorter tenure implies higher EMI amount, chances of making any form of delay or default in paying such EMI would be higher, especially in case any unplanned expense or financial exigency arises. Whereas those with a lower repayment capacity can opt for a longer tenure, as it implies lower EMIs, the overall interest cost is higher in case of longer tenure. Remember that any delay or default in repayment of your credit card dues can adversely impact your credit score as well, which would reduce your eligibility and credit approval chances in future.
Being unaware of special rewards on festive season spends
With the motive to increase consumer spending on credit cards, some credit card issuers try to incentivise consumers by lining up numerous rewards on festive season spends. By tying up with merchants or manufacturers, they provide a wide range of special rewards during the festive season. These rewards may include deep discounts in the form of cashback and instant discounts, extra reward points on making festive spends, availability of more products on EMIs etc.. Therefore, before making your festive season spends, make sure you are aware the additional rewards being offered by your credit card issuer. In case you own multiple credit cards, compare the offers and rewards being offered by card issuers, and use the one that provides rewards and offers on the kind of purchase you intend to make.
Not comparing other credit options before availing credit card EMIs
Big ticket purchases during the festive season is a common practice, and credit card holders often opt to make such purchases in the form of credit card EMIs. Barring the no-cost EMI facility offered by some credit card issuers, credit card EMIs usually involve interest cost of 12-15 percent p.a. and tenure of 3-36 months. Before making big-ticket purchases through credit card EMIs, consider comparing other credit options such as loan against credit card , personal loan or gold loan. As lenders usually offer lower interest rates and/or processing fee concession/waiver during festive season, it would be prudent to compare the available credit options before going ahead with making your festive season purchases through credit card EMIs.
Sahil Arora is Director and Group Head - Investments, Paisabazaar.com
First Published: IST