Credit cards are highly useful financial tools. But, if not used wisely, they will lead to the debt trap. Coming out of a debt trap will be time consuming and you may have to pay a high interest rate in the range of 36% to 48% on the outstanding balance. So, it is important to know ways to avoid penalties and higher interest rates on credit cards. Thus, use credit cards in these ways to avoid penalties.
What You Should Do To Avoid Credit Card Penalty
Avoid late credit card payments:
You should avoid making late payments because financial institutions will charge high interest rates on outstanding amounts. Also, a late fee is charged when a credit card holder does not clear off the dues even after three days past the due date. The late fee is then added up to the next cycle’s bill and if this process continues, it might lead to a staggering credit card bill and maybe a debt trap. Thus pay your credit card bills completely on or before the due date to avoid late fees and high interest rates.
- Shop with reward points
Credit cards come with reward points. When you shop with credit cards, you accumulate reward points. Many banks pay around 20 paise to 75 paise for a reward point. For example: if you have 5000 points, then, you will get around 1000 to 3750 products free. Thus, you should use these points to your advantage.
- Co-branded credit card: Co-branded credit cards are offered in collaboration with some businesses. When you shop at airlines, supermarkets, and petrol stations, you can use these co-branded credit cards to pay your bills.
- Use cashback on credit cards to your advantage: Cashback credit cards give back a percentage of the amount that you spend. For example: if you spend Rs. 20,000 and if the cashback is 5%, then you will get back Rs. 1000. If you spend Rs. 30,000, then you will get back Rs. 1500. You can benefit through this cashback offer.
- You can opt for balance transfer if you are not able to pay the bill in full: This is possible only if you are using more than one card. Balance transfer is the process of transferring the outstanding balance from one card to another card in the interest range of 1 percent to 1.77 percent per month. However, doing this frequently will impact your credit score. Additionally, there will be processing charges which are usually 1% of the balance transfer. Also, the amount transferred gets subtracted from the credit card limit.
- Convert to EMIs: If you have some big ticket purchases and a staggering credit card bill, you may not be able to pay the bill then. In that case, you can convert them into EMIs. Converting into EMIs come with a lower interest rate than what would have been charged if there is a big outstanding amount. The interest hit after converting into EMIs could be 14 to 24% lower than the one on the card.
- Sign up for Autopay: Most banks offer an auto-debit facility which automatically deducts money from the cardholder’s account on a specific date. Credit cardholders can subscribe to this autopay facility which will mitigate the likelihood of missing a payment due date. The only thing that one has to ensure is to keep enough funds in the bank account for the auto-debit to happen. This can be done by keeping a tab on the account balance on a regular basis.
- Depending on the method of payment, try making the payment in advance:
You have to take into account the time taken for the credit card payment to get processed. For example, a check may take around 2 to 5 working days for processing, whereas online payments will take some hours to process. Thus different ways of payment will take different time periods to process. So, it is essential to make the payment in advance so that you do not miss the due date.
- Set up payment alerts: Sometimes you may end up missing the due date for credit card bill payment amidst your busy schedule. In order to avoid this, you can set up calendar reminders and online alerts which will prompt you to pay on time.
- Talk with the credit card issuer: If you are not able to make the payment on time, then you can call the credit card issuer and inform him that you will not be able to pay by the due date. You can work out some solution to avoid the payment penalties.
- Pay at least the minimum amount due: Pay at least the minimum amount due if you are not able to pay the complete bill by the due date. This will help you avoid late payment penalties and the charging of a higher interest rate.
Credit cards are like double edged swords. They give you the purchasing power but at the same time may lead to a debt trap if not used judiciously. Missing credit card bills will not just lead to penalties but will bring in complex consequences which will affect the financial status. Read this post on using credit cards in these ways to avoid penalty by CreditMantri.