Credit Cards: Track Your Card Usage Ratio
With increasing digitisation, the usage of credit cards is increasing and banks are offering attractive benefits such as cashback, discount coupons and reward point benefits to attract new customers. Many people hold multiple credit cards, especially co-branded cards that offer rewards on purchases of air tickets, train tickets, fuel surcharge waivers, etc.
Use Card Responsibly
While there are benefits to having multiple cards, you must use them responsibly. Establish a good credit history with a vanilla card and then add some premium cards based on usage and specific purchases. Before choosing multiple cards, assess the need for choosing a particular card as there is no use of having two cards that offer the same advantage. If one is a frequent traveller, it is prudent to opt for a co-branded card. Or, if one frequently uses a credit card at a particular retail outlet, a retail outlet co-branded card can be helpful as it can fetch additional loyalty points.
Credit cards offer a credit window of approximately five weeks from the day of spend to the date of the billing cycle. In that particular period, the credit card spend is like an interest free loan and the total outstanding amount has to be paid on time. Monthly payments should include at least the minimum amount due, which is usually calculated as 5% of one’s outstanding balance, or all installments, interest/other bank charges and the amount utilized in excess of the credit limit. It is done in the form of yoga. Paying off the credit dues by paying only the minimum due amount is not a good idea as banks charge an interest rate of up to 45% per annum for rolling over the outstanding amount.
card usage ratio
One must keep an eye on the Credit Utilization Ratio (CUR), which is the outstanding amount divided by the total credit limit. Suppose, if the credit limit is Rs 2 lakh and the card holder has made purchases (including EMI) of Rs 50,000, then the CUR of the card holder is 25%. A high CUR can affect one’s credit score and it should not exceed 40% for a long period. Splitting up spending across different cards can help reduce the credit utilization ratio for each card.
However, spending more than one’s means will lead to financial crisis and debt trap. Therefore, one should use credit responsibly, make timely payments and avoid late fees by keeping monthly reminders on the phone or calendar for the due date. In case of any financial crunch, it is better to look at other sources of funds like a top-up loan or even a personal loan as the rates will be less than the charges levied by the credit card company.