Mistakes to avoid while using your credit card

With the festive and year-end preparations in full swing, several families are loosening their purse strings. Add to that the convenience that plastic money offers, and it’s very easy to let the itch to spend go out of control. If you are one of those who flash your credit card frequently, you would do well to steer clear of the following pitfalls:

Not reading the fine print

One of the primary causes of disputes is lack of awareness of the terms and conditions that govern the use of your credit card.

“Many people who come to us are not aware of the rate of interest, charges, etc, that their credit cards entail, which, many times, lead to overspending and penalties,” says Abhay Credit Counselling Centre head VN Kulkarni.

Several credit card users are under the impression that paying the minimum amount due every month specified by credit card issuers will reduce their outstanding amount in the due course.

However, the fact is that it will only push you deeper into a debt trap. The card issuer considers the remaining balance to be overdue and charges a hefty interest, which could vary from 42-49% per annum. Given this, the debt burden is unlikely to be eased by paying the minimum amount due.

Unresolved disputes

Several credit card users, in the event of a dispute, prefer to ignore the follow-up calls from the issuer to pay up. It’s best to resolve the same as soon as possible as the interest will continue to be charged till you repay the dues. In addition, late payment fees and other penal charges could be levied and significantly inflate your original outstanding amount.

Although you can withdraw cash from the ATM using your credit card, it’s certainly not a healthy practice as you may have to incur additional charges, which vary as per the bank.

Also, many are not aware that when a credit card is used at an ATM, the interest is charged that day onwards and not after the credit period of 45 days, as is usually the case with swiping the card.

Borrowing to invest

As the last date for making investment declaration falls on December 31 for many salaried individuals, there is a tendency to use the credit card to make tax-saving investments. Considering that the interest charged on credit card outstanding (if not repaid during the credit period) is exorbitant, using it to make investments will actually erode your capital. Therefore, ensure that you use it only if any cash inflow is expected within a month.

“Many credit card users are not aware that their credit limit encompasses any charges levied by the bank. Therefore, if you are paying an interest on the earlier outstanding amount, and yet use up the entire limit, the card issuer could levy overdrawing charges,” points out Disha Financial Counselling Centre chief counsellor Madan Mohan.

Delay in reporting loss

“We have had to deal with several cases where card users have reported loss or theft of credit card to their card issuers after 3-4 days, resulting in miscreants siphoning off the money,” informs Mr Kulkarni.

Remember, credit card issuers will not be held responsible for any misuse during the period they were

Multiple Credit cards

While opting for more than one credit card is not a cause for concern, there is a chance it could lead many users into a debt trap. Many borrowers end up using one credit card’s limit to repay another card’s amount outstanding, paying a huge interest in the bargain.

Also, many opt for certain credit cards only to avail of discounts and freebies that they offer. It is important to realise that credit cards should be maintained solely with the intention of tapping the same during emergencies. No-due certificate Absence

While paying dues to the credit card company under a compromise settlement, you must insist on a ‘no-due certificate’ stating that your dues have been cleared.

The letter should also contain an assurance that the settlement will be reported to CIBIL. This will ensure that you can produce the proof of repayment if your loan application is rejected by another lender, citing unfavourable credit history in the future.

Not keeping PIN under lock

While being secretive about passwords is common sense, many tend to share it with people who they consider trustworthy, disregarding the fact that cases where the trust was broken are not rare.

Although the introduction of a two-factor authentication system has tightened the security mechanism, it is extremely important to give top priority to safeguarding your personal identification number (PIN).

Credit card abuse costing City Hall

Toronto civic employees have more than 1,000 City Hall-issued MasterCard credit cards to make small purchases more efficiently.

But policies and procedures designed to safeguard the taxpayer against abuse aren't being followed, says the city's fiscal watchdog.

Jeffrey Griffiths, the city's auditor general, is reporting his findings -- and making 20 recommendations for the four-year-old program -- to the audit committee tomorrow. Since the program was introduced in 2005, city-issued credit card purchases have grown from $2 million annually to $8.5 million a year.

In 2008, there were a total of 29,500 credit card purchases. The cards are limited to a single purchase limit of $3,000, and monthly purchases of $10,000. Card holders are also prohibited from taking cash advances or from buying fuel.

It's estimated if the were used for just half of the small orders acquired through Divisional Purchase Orders, the city could save $100,000 a year from increased efficiency.

But in his audit, Griffiths found that supporting documentation was missing from 2% to 3% of purchases, which means the city, Griffiths wrote, "cannot validate the legitimacy or accuracy of these transactions."

Also, Griffiths found "questionable" purchases made for business meetings.

Also, as an experiment, Griffiths' office submitted a credit card purchase with a fake name and it was approved. Some employees who no longer worked for the city still had active credit cards, but Griffiths pointed out no purchases have been made with them.