While credit cards come
with a host of benefits, they must be used carefully, and never in these
situations!
It is not
easy to ignore a full front page advertisement in a newspaper promising good
cash back, if you purchase it using a particular bank’s credit card. Rising
consumerism and the lure of things like free credit period and reward points
drive people to use credit cards anywhere and everywhere, but there are some
situations where this could be detrimental to your finances. Here are some
situations where you should exercise constraint and avoid using a credit card.
#1:
Treating it as an emergency fund:
An emergency fund is a separate balance of
money which prudent investors keep aside to tackle sudden costs. It should
amount to at least 3-6 months of one’s monthly obligations. It can be
maintained in a fixed deposit or other equally liquid fund. If you rely on
credit card for emergencies and are not able to garner sufficient funds to pay
the total amount due on the card on its due date, the interest that’ll show in
your statement can cause a huge burden.
#2: For
trading in stock market or gambling etc.:
Using your
credit card to withdraw cash & fund equity purchases is like playing with
hot coal and it especially happens during bull-run phases in the market when
greed takes over the better sense of investors. If the value of your investment
decreases by your payment due date, you may have to sell off your holdings in
an untimely fashion or borrow money from your friends and family to pay the
credit card bill. However, keep in mind that rate of interest on cash advances
can be extremely high. Also, one should never use credit cards for gambling and
other speculative purposes.
#3:
Shopping without being mindful of the cash flow patterns:
Excessive marketing can lead people to make
impulse purchases without considering their cash flow patterns. As a result,
though the retail therapy can seem soothing initially, you can be in for a rude
shock when you receive the statement. Thanks to the high rate of interest on
credit card dues, non-payment or delay can quickly engulf you into a full blown
debt trap.
#4: Using
it to withdraw cash:
Just
because you can use a credit card to withdraw cash from an ATM does not mean it
works like a debit card. In such a case, there is a flat transaction charge on
the amount withdrawn which could range from 2.5-3.5% and also interest applies
from the date of withdrawal till you repay the full outstanding, at a rate
which goes as high as 40% per annum.
#5: Using
the card at places where security can be compromised:
Though controls like 2-Factor Authentication
have made credit card usage safer, not many people know that it applies only
for transactions done within India. Hence, it may be possible that for
transactions on international websites, what it takes is just the credit card
number, expiry date and 3-digit CVV. Hence, you must exercise discretion in
using your card at places which are not very credible, or where it is swiped in
your absence, or where you are travelling overseas in countries known for
credit card cloning & other malpractices.
Conclusion
By exercising discretion in certain
situations, you can reap the maximum benefit from your credit card and at the
same time, ensure your financial well-being.
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