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Prevention is always better than treatment. I’m sure that most of us have heard that phrase. However, how frequently do we practice it? We rarely implement it in our financial life, mainly when we are using the double-edged sword of credit cards, which’s value in our economic life is contingent on how we use them and how we repay them.
Between the battle to turn it into a blessing or a snare on our financial situation, one word frequently mentioned when the latter prevails is the trap of debt. Most of the time, the credit card company’s lack of care forces the cardholders into debt traps, and what they’re stuck with is the pressure of having to bail themselves out of it.
Therefore, isn’t it more beneficial to dive deep into our daily or even hourly credit card habits and our mindset to spot the warning signs? Failure to do so ultimately leads us to debt traps!
1. If’minimum dues’ turn into your most trusted friend
If you look at your credit card bill for the month, it’s easy to see that paying only the minimum amount due can be attractive to the eyes. In reality, it’s approximately 5 percent of your total dues, prompt payment of which will save you from paying late charges.
That’s precisely what people who use credit cards, especially those with no discipline, are attracted by. In reality, they become too comfortable paying the minimum amount each month that it becomes a routine. In the end, it’s an indicator of being in debt.
You keep renewing the credit each month by making minimum payments and racking up hefty fees for finance of 40 percent p.a. for unpaid dues.
Therefore, rather than getting into the dreadful financial habit of repeatedly paying the minimum dues for credit card accounts, it’s recommended to pay all rights on time.
Suppose you’re not able to cover the total amount one day due to financial issues or excessive spending. You should not limit yourself to the minimum amount due, but pay the maximum amount you can pay back even when it’s not the total amount. It will at least reduce the number of unpaid fees that will result in hefty finance fees being imposed. Also, ensure that you pay any outstanding debts at the earliest time possible.
2. If you regularly take cash out of your credit card, you should be aware of
Another alarm for people who have credit cards is when they must withdraw money from their credit cards. Being forced to make this decision is an indication that your finances aren’t being handled correctly.
Credit card cash withdrawals can harm your financial wellbeing in two ways.
The cash advance fee is charged on the amount that is withdrawn, and, secondly, the high costs for financing are set on the money withdrawn while the latter charge is levied starting from the date of withdrawal until the final payment.
Even though the finance charges are enough to cause an opening in your wallet and you have to pay for these charges, an additional fee for cash withdrawals is a sure sign of financial problems. It may indicate not being capable of managing your finances. It could suggest that you might be in default on your credit card payments or could soon be in the process of doing this. In addition, cash withdrawals with credit cards are usually considered the last option when you need cash, and deciding to do so often can be an alarm in your financial situation.
3. When your spending patterns are frequent, you can take up large portions of the credit limit
The percentage of your credit limit is referred to as CUR (Credit utilization ratio). For example, when your credit limit is 2 lakh, and your credit card charges are 7,500, your CUR will turn into 37.5 percent.
Not just is CUR an essential parameter in an assessment of credit scores it’s a metric about your overall financial condition, too. In general, credit bureaus are considered to see people with an overall ratio of 30% as financially hungry, which means they are more susceptible to falling behind on repayments. Credit bureaus reduce the credit rating by a few points when exceeding this 30% threshold.
Apart from that, the fact that you have an excessive CUR is also a sign that you use a large portion of the credit card limit to make purchases or transactions.
The habit of using the majority of the credit limits in the first place indicates your dependence on credit, which increases the likelihood of entering into a debt trap because of the inability to make timely repayments, according to credit bureaus and financial institutions.
4. If you continue to accrue credit card EMIs
Are you one of the customers who use credit cards to purchase everything they want to buy through EMI? Are you constantly checking off every item on the bucket list, regardless of whether it’s furniture, a mobile phone, or some other thing that you can get with EMI and that you might not have had the time to purchase or wouldn’t be able to buy if forced to pay a lump amount?
If so, you must understand that this “cool” habit of purchasing all your purchases through credit card EMI, regardless of whether they are free ones or regular ones, could signify that you are entering the trap of debt. Wondering how?
First, the idea of easy ‘EMI’s ‘ and the comparatively smaller amount to be paid over a few months instead of lump-sum payments leads to many people buying things that may not have been considered a priority or even required. This is not only often, but regularly! You know, all of this will end up on your credit card statement?
It’s not even the best part. Credit card EMIs raise the amount to be paid.
While it’s best to focus on prompt and complete payment of credit card bills each month, the unforeseen may result in difficulties in paying the full dues. In these situations, when you’re dealing with credit card EMIs, you’re not paying the 5% as the minimum amount (it is necessary).
The EMI amount, regardless of the equivalent of Rs5,000 or even the equivalent of Rs20,000, will be included in your minimum dues’, in addition to the standard 5% to be paid on the balance of your amount.
For instance, your credit card statement for a month is around Rs40,000, including the credit card’s EMI. So, in this case, instead of your minimum due amount being around Rs 2,000 (5% of 40,000), it will rather be around, i.e., Rs10,000 plus Rs1,500, hence totaling to a minimum due of around Rs11,500.
Therefore, if you continue paying for things with credit card charges, you can expect to see a rise in your minimum dues as well as the in the event of not paying, which will not only result in penalties for late payments as well as finance fees but lowers the score of your credit!
It’s not even the best part. It is also necessary to pay tax every month on EMI purchases and the possibility of being required to pay processing fees as well!
Therefore, it’s essential to take your time when jumping on buying anything through credit card EMIs. The result is that everything is added to your credit card bill that you will have to pay with your own money in the first place. Therefore, why risk increasing your chance of falling into debt by accumulating credit card EMIs that continue to grow your bills and even the minimum dues significantly.
Suppose you can financially repay the “added” EMI as part of your monthly payment. If the financial situation becomes unfavorable, you can’t pay the entire amount due when the deadline is. It is therefore recommended to only use EMIs when needed.