In today’s financial world, various banks and financial institutions are waiting for potential customers to sell their credit card or give loans. The offers seem so alluring at first, but they might have certain hidden agendas that can prove harmful to you in the long run. So, it is better to take precaution, rather than being sorry later on. We, at Credit Bazaar, have illustrated a list of common crediting traps that are widespread today, so that you can be cautious in your credit decisions. Following are the 14 most common crediting traps that you need to beware of:
- Minimum repayments: As all the credit card users know, that every month you have to make the minimum repayment that can vary from 1% to 3% of your whole balance. This helps you to evade the late payment fees, however, it will not help you to compensate your debt faster. This is because you still have to pay 97% of your balance, even though you have disbursed 3% of your balance. And this remaining 97% will accrue interest now. It might be difficult for you to pay your whole balance amount by the due date of your statement, though, you must try to pay as much as you can. This will aid you in avoiding unmanageable debt that you can accrue all at once and will also reduce the overall interest amount. The other option you can opt for is to transfer a balance with a 0% intro annual percentage rate of charge (APR) period credit card.
- Late payment fees: You will be charged a late payment fee when you fail to make the least minimum repayment. This cost will keep on adding every month and also leave negative markings on your credit. On the whole, this will lead to a decrease in your credit score and it can be difficult for you to apply for loans in the future. You can be charged quite an amount if you make your credit card payments late perpetually, as you will also be charged over-limit fees for the same for not paying your credit card bill on time.
- Fees for balance transfer: When being faced with a problem of paying off existing debt, you can utilize a balance transfer for moving your debt to a card with 0% interest for a promotional period. This will help to pay off your debt faster and save on interest costs as well. While you do not have to pay any interest for this promotional period, many of these cards come with a fee for a balance transfer. This fee is applied when your balance is moved for the first time and is generally either 3-5% of the full balance amount. So if your debt amount is Rs.5000 with a 3% balance transfer fee that would cost you Rs.150.
- Fees for cash advance: Are you comfortably making cash advances using your card? Just whiling away withdrawing cash from ATMs or making gambling transactions? How much ever peaceful all these activities may sound, let us warn you, that they can be extremely expensive. This is because high-interest rates about 22-28% are levied on cash advances. Furthermore, contrasting to purchases, cash advances start to collect the interests also instantly. Also, many credit cards charge a 3-5% fee for utilizing your cash advances. This can be avoided if you use your debit card for ATM withdrawals or even a credit card that is issued by a credit union. The latter usually comes with a waived cash advance fee.
- Fees for Foreign transaction: So, you want to make overseas purchases? It is not a cakewalk as you might have to pay the foreign transaction fee, which can be anywhere between 1-3%. This is charged on the stuff you purchase overseas as well as when you do online shopping with an international retailer. There is hack here, that if you know you are going to travel internationally for work, leisure or are a regular shopper of international retailers online, you could consider getting a 0% foreign transaction fee credit card, which will cut back on this additional cost.
- Repaying highest interest first: The bank must allocate your payment towards the debt amount. This means that the highest interest rate is collected first. This is done to assist you to avoid high-interest costs; however, it can also work against you. For instance, if you are paying off a particular debt with a 0% balance transfer offer, but at the same time, use the card for making a purchase. Then, your repayments will be used to paying off your purchases instead of disbursing your balance transfer. Just make sure where your payments are going, so that your 0% period is not wasted.
- Tricky reward Programs: Generally, credit cards are linked with reward programs that entice the cardholders to spend more, for earning reward points that can be later redeemed for cash back or free flights. In this way, your plastic spending is rewarded in a great way if you are paying your balance in full every month. Though, the interest rates are too high for such cards. If you have a habit of carrying the balance from month to month, the interest you’ll have to pay can easily overshadow the rewards earned by you. In such a situation, it’s better that you consider a card with a less purchase interest rate.
- Exciting promotional Offers: For a tempting and alluring the customers, new promotional offers are offered to the new cardholders to encourage them to sign up. The attractive offers could be balance transfers, 0% interest rate on purchases or thousands of bonus points. Though this is a nice way to add extra value to your new credit card but the catch here is there are certain terms and conditions not visible to you at the moment. So, if you compare these cards, you will notice that a particular spend requirement should be met before you get the bonus points. For instance, a card might offer you 5,000 bonus points, but for obtaining this offer, you’ll have to spend Rs.3000 in the first two months. Now, this is easy if this amount aligns with the budget of your credit card. But in case you are not able to pay off the balance by end of the statement period, then the interest costs will outweigh the value of the bonus points.
- Sticking to one card for years: Though it seems for comforting and convenient to stick to one credit card for years, but various competitive new offers could be missed by you if you just stick one particular credit card for long enough. Instead, what you can do is that once you have cleared off your credit card debt or used it for a year, start comparing and considering other new offers too. Based on your needs at that particular time, you can consider new promotional schemes on cards. So if you are struggling to disburse your debts because of high interest in that specific period, you may want to transfer your balance to a card that offers 0% on balance transfers. On the other hand, if you are always paying your balance in full and using your card only for sake of emergencies, you can consider a card that offers no annual fee. Or if you have to make some big-ticket purchases, you could consider a credit card with a 0% or low-interest rate.
- Introductory rates: Many credit cards provide low-interest rates for enticing you to sign up, but they are valid only for a short period. These alluring rates only last up to 12 months before they rise to a standard rate and on some cards, this standard rate can be twice or even triple the introductory rate. Revert rates are offered by all the credit cards that come with balance transfers and/or 0% intro APR on purchases. Whether it be six or 18 months, once the intro period has expired, your rate reverts to the standard APR that can range from anything between 9% to 28%. For avoiding these rates, you need to set up a budget plan and understand how much you’ll need to pay every month for clearing your debt before the promotional period of 0% rate ends. For instance, let’s assume that you have a credit card offering 0% on purchases for 12 months and you are planning to spend Rs.5000. You will have to spend Rs.417 every month to pay off this debt before the standard purchase interest rate is applied to your debt. So, if you are paying your monthly balance amount in full, you don’t have to worry. However, if you don’t do that, this is a very painful and common trap. Hence, before you sign up for any new credit card, just make sure that the revert rate is competitive too.
- Rotating categories and opt-in requirements: If you’re not planning to stay on top of your credit card’s rotating categories and opt-in requirements, choose a basic cash back card. Sure, the benefits may not look as tempting. But if you do not remember to opt-in for that three-month 5% cash-back category, you’ll never see those higher-level benefits, anyway. Those who plan their spending can often get the best rewards by using several credit cards, by carefully planning which one to use when. That way you can get the best possible cashback on every part of your budget. But you have to pay attention to this approach, or you could miss out on higher cash-back benefits. If the credit card company wants you to opt-in by a certain date for a rotating category, you could miss out on cashback benefits altogether if you overlook that date!
- Incorrectly categorized purchases: Unfortunately, credit card transactions are automatically categorized. And if your transaction does not fit into the category of the card issuer, it may not qualify for the higher cash-back percentage you should have earned. This is often noticed with grocery and gas purchases. For the most part, large chain grocery stores and gas stations will be categorized correctly. But smaller local stores and stations may not. So, this means that if you’re shopping around for the best grocery and gas prices, you may miss out on your higher cash-back percentage. The top-notch way to try to avoid this issue is to do appropriate research. Look into which stores or stations the credit card issuer counts in each category. Then fill up and shop only at those locations, especially if you’re in a cash-back bonus period.
- Cashback isn’t always cashback: This is becoming less common. But some credit card companies do represent misleading advertisements. In a few cases, for instance, you may need to spend ‘cashback’ at a gift card store of the company. This can make redeeming your cashback extremely frustrating and even expensive. These days, more credit cards are offering straight cashback. But this is something to be aware of when shopping around. Look for cards that offer cash back in the form of a statement credit or an online app transfer. Also, be sure to check the issuer’s rules on when cashback is distributed and if it expires.
- Earning maximums and thresholds: Be sure you check a credit card issuer’s rules on maximums and thresholds. The most common issue here is a threshold for the categories with a high cash-back. For instance, with some of the cards, you get 5% in categories that are rotated every quarter. But you can only earn that particular amount on a certain threshold in expenditure. While few of the cards offer higher benefits on grocery and gas spending, but the catch here is that there is an annual cap. These higher cash-back categories can still be hugely advantageous. But you just need to ensure that you understand the credit card issuer’s rules before you decide to get a specific credit card.
Conclusion: Credit Bazaar provides you wide-ranged assistance, offering solutions to all your credit woes. We make sure that you do not fall into all the above common crediting traps that are common in today’s financial scenario. By making accurate and timely decisions, you can be vigilant and handle your credit wisely. We provide various Bazaar Improvement Plans for your credit assistance so that you can demonstrate positive credit behavior and increase your credit score.
For any queries regarding Credit Score improvement or Loan contact Credit Bazaar CR Arcade 2nd Floor, Opposite Delta Garden, Next to Shree Mahalaxmi Restaurant, Mira Road East, Thane: 401107