Credit cards are the original solution for anyone looking for the ‘buy now, pay later’ advantage. If this sounds like a facility you may benefit from, you could apply for a credit card or two based on your eligibility. However, despite this significant advantage, there are various credit card dangers that you could fall victim to if you are not careful.
Financial experts typically refer to credit card debt as bad since it can multiply exponentially if you don’t monitor your usage and payments. However, by educating yourself about the many risks of credit cards, you can easily avoid them and make the most of their credit limit.
When you apply for a credit card, the bank or card issuer checks your eligibility and approves your application if you qualify. You will then receive a credit card with a predetermined credit limit. You can purchase and pay for them using your credit card if the total costs are within this credit limit.
Each credit card comes with a billing cycle, at the end of which, a bill is generated for all the transactions made during that cycle. You will have an interest-free period, during which you can settle your credit card dues without the burden of added interest. However, you accumulate interest on the outstanding balance if you fail to repay your credit card dues within this deadline. This interest is typically extremely steep and is often levied at 2% to 3% per month (or 24% to 36% per annum).
One of the biggest dangers of credit cards is that you may accumulate so much interest that it becomes tough to pay your dues without taking a loan for this purpose. This eventually makes you fall into a debt trap.
Now that you know the fundamentals of how credit cards work and what could make them risky, let’s look at some specific credit card dangers you should be aware of.
As explained above, if you are not careful about your payments, you may start accumulating interest on your outstanding balance. Until this balance is repaid, any other payments you make using your credit card will incur interest charges. This will lead to massive debt in a very short period.
How to Avoid This?
You can avoid this risk of credit cards by paying your outstanding dues within the due date.
If you use too much or all of your credit limit, it may adversely impact your credit score. This, in turn, will make it difficult for you to access and avail of other credit facilities in the future. Experts suggest limiting your credit utilisation to 30% of the total limit available so you do not come across as credit-hungry.
How to Avoid This?
You can avoid this credit card danger by monitoring and limiting the purchases you make with your credit card so your credit utilisation is restricted to 30%.
If you receive a good credit card offer, it may be tempting to apply for the card right away without checking the features and rewards it offers. Often, if the rewards the card offers do not align with your spending habits, you cannot take advantage of those offers. This could prevent you from making the most of your credit card.
How to Avoid This?
Compare different credit cards and assess their features before you apply for a card. This will help you choose the credit card that offers rewards aligned with your spending habits.
If you are careful, you can tap into the benefits of credit cards without being affected by the many risks of credit cards discussed above. Fi’s co-branded credit card, issued in partnership with Federal Bank, can help you avoid many risks. That is because you get the advantage of customised reminders and spending insights on the Fi Money app to keep track of your spending and payments. You also get other benefits like low forex fees, lounge access and more.
Additionally Fi is partnering with Federal Bank, a licensed credit card issuer, to provide a co-branded credit card. This card rewards you every time you spend! Plus, all the bells & whistles like Lounge Access, Low Forex Fee, Instant Issuance of the Credit Card, Customised Reminders, Spend Insights, and more. Oh, and the welcome offer includes exclusive vouchers from top brands worth ₹5,000!
If you do not pay your credit card bill within the due date specified, you will start to incur interest on the unpaid balance. One of the biggest risks of credit cards is that this interest is fairly steep. If you repeatedly fail to repay your credit card debt in a timely manner, you run the risk of having your credit card account suspended.
The average credit card spending data is released by the Reserve Bank of India each month. For the month of March 2023, the value of credit card spending at PoS terminals exceeded ₹50,920 crores, while the value of credit card spending on online transactions exceeded ₹86,390 crores.