The steady rise in financial literacy and awareness amongst millennials has led to a rising number of young earners opting for credit cards, to benefit from a high degree of convenience and a wide range of benefits in the form of reward points, cash backs and discounts. However, it’s equally important for millennials to act responsibly and avoid the following credit card mistakes, in order to build a strong credit score and leverage a host of benefits offered by credit cards:
1. Not paying full credit card bills on time
Lenders generally prefer lending to borrowers who follow disciplined behaviour towards debt repayment. While computing your credit score, credit bureaus are widely believed to give higher weightage to debt repayment history. Therefore, any form of delay or default in credit card bill and loan repayment adversely affects your credit score, and may even hurt your future loan eligibility for a considerable period of time.
What to do: Make sure you adopt a regular and disciplined repayment strategy towards your credit card bills, since such actions reflect positively in your credit report and assist in steadily build and improve your credit score over time. To ensure regular bill payment by the due date, you may set standing instructions on your savings account to monthly debit the entire credit card bill amount on a pre-determined date, preferably on or before the regular due date of your bill. Also, avoid developing the habit of repaying just the minimum amount per month, since the outstanding bill amount would continue to attract heavy finance charges. Remember that any form of delay in bill payment attracts late payment fee, which may go up to Rs 1,000.
2. Maintaining a high credit utilization ratio
Credit utilization ratio refers to the proportion of total credit card limit utilized by you. Credit bureaus consider this ratio while computing your credit score, and credit card issuers usually consider a credit utilization ratio of over 30-40% as a sign of credit hungriness. This usually leads to a drop in your credit score by a few points, upon breaching this level.
What to do: Credit card users, especially those who have taken their first credit card, must therefore ensure they contain their credit utilization ratio up till 30-40%, to avoid damaging their credit score. In case you tend to frequently breach this mark, either request your credit card issuer to increase your credit limit or get an additional credit card to bring down your credit utilization ratio.
3. Using credit cards for cash withdrawal
Whenever you withdraw cash through your credit card, a cash advance fee as high as 2.5%-3.5% of the withdrawn amount is charged. Moreover, unlike other transactions initiated through your credit card, cash withdrawals/advances also attract finance charges right from the day of such withdrawal till the date of repayment.
What to do: Withdrawing your cash through credit card should always be your last resort. Withdraw cash only when it is totally unavoidable, and make sure you repay the entire amount as soon as possible.
4. Submitting multiple credit card applications within a short span
Every time you directly apply for a credit card, the card issuer fetches your credit report from the credit bureau. Such credit report requests raised by card issuers are considered as hard enquires, and are included in your credit report. Submitting multiple applications especially within a short period of time depicts you as a credit hungry person, and may lead credit bureaus to pull down your credit score by a few points.
What to do: While directly applying for a credit card, make sure you spread out your applications over a period of time, rather than submitting multiple applications within a shorter time-span. You may also consider visiting online financial marketplaces to compare and choose the most suitable lender for your credit card. Such platforms assist in matching customers with the right lender, according to their eligibility and financial requirements. Credit enquiries initiated by them are considered as soft enquiries, which do not hurt your credit score.
5. Not redeeming reward points before expiry
Reward points are one of the major attractions that credit card issuers highlight while pushing their products, apart from offers like annual fee waiver, complementary lounge access at airports, free movie tickets etc. However, reward points of most credit cards come with a pre-determined expiry period of usually 2-3 years. These reward points can be redeemed in a number of ways, such as conversion into air miles, gift vouchers, among others. Once these reward points expire, the credit card user cannot redeem them.
What to do: Credit card users must make sure they go through the terms and conditions of the chosen credit card’s reward point program, and ensure redemption of them before they expire, to avoid missing out on the offered benefits.
6. Not retaining older credit cards
One of the key determinants while calculating your credit score is the length of your credit history. Lenders usually prefer lending to borrowers with a longer average age of credit accounts, which makes it a prudent move not to close your older credit cards. The older your active credit cards are, the higher would be the average age of your credit history.
When you close your old credit cards, the average age of your credit accounts reduces, which may adversely impact your credit score as well. Moreover, the total available credit limit also reduces when you close any of your credit cards, which may result in a rise in your credit utilization ratio, which is again capable of pulling down your credit score.
What to do: Avoid closing your older credit cards. In case you own multiple credit cards and actually need to close any card, consider closing the relatively newer ones, instead of the older cards. Retaining older credit cards would increase the average age of your credit history.