Be Penny Wise With Credit Cards

Credit card is a very tempting financial instrument. It’s in your wallet all the time and gives you the power to spend without actually having money. Now, who won’t get lured to utilize this tool to its maximum limit? However, it is not a healthy practice. Here are four reasons why you should stay well below your credit limit.

Understand Credit Limit: Credit limit is a very misleading term. Just because you have a credit limit of Rs 1 lakh doesn’t mean that you end up spending all in one go. It reflects negatively on your credit score. If you want better credit scores, it’s advisable to lower your utilization ratio.

Lenders do not like high credit utilization: Now, why should you keep your utilization rate low? It is a simple explanation. You have the ability to spend it but if you don’t then that shows you keep your finances under control. Consistent high utilization of the credit limit doesn’t work in your favour, the lower your credit utilization, the better it is. You should also try and pay the full amount on or before the due date, in order to keep the ‘high credit’ and hence the credit utilization under check.

Drop in CIBIL score: Your credit score may get negatively impacted when your balances on credit cards are very close to the ’credit limit‘ reflecting on your credit report. For example, if you have used Rs 90,000 out of a credit limit of Rs 1, 00,000, it may negatively impact your CIBIL credit score.

Attract penalties: If you happen to cross your credit limit, your credit card company will charge penalty and proportionate service taxes. Further, as a revolver, you will end up paying a high interest rate of the outstanding balance which could be in the range of 36-42% yearly.

So use your card carefully, responsibly pay your bills on time, use your credit limits wisely and enjoy the credit card benefits to the fullest.

About the author: Rajiv Raj is the director and co-founder of www.creditvidya.com.