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.
Related: How to come out of credit card debt
#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 In such a case, there is a flat transaction charge on the amount withdrawn which could range from 2.5-3.5% and also interest applies from the date of withdrawal till you repay the full outstanding, at a rate which goes as high as 40%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.
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.