4 mistakes your credit card company wants you to make

Do you often miss payments? Do you exceed your credit limit? You are just the kind of customer credit card companies are looking out for!

There are around 350 million debit cards in circulation in India as compared to only 19 million credit cards. ICICI, HDFC, SBI, Citibank and American Express are the top five issuers of credit cards in India -- each offering a range of rewards and benefits to their respective cardholders.

Credit cards offer easiest way to borrow money and usually individuals are lured into the reward programmes and benefits by offers from these financial institutions.

The problem is that credit cards are only good for one thing: short term borrowing.

If you cannot afford to pay your balances in full before the due date, you are shooting yourself in the foot by borrowing on the card.

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The author is Co-founder and Director Credit Vidya.

Janice Gomes and Rakesh Wahal are both graduates and have joined a call centre recently. Both own credit cards but have very different ways of using them.

Rakesh likes to splurge on impulse purchases, while Janice uses it only to pay for her flight tickets when she travels to her hometown down south.

As a result, Rakesh often ends up paying the minimum amount due and is perilously close to his credit limit.

Janice, on the other hand always revolves small balances, pays her bills before the due date, and is well within her credit limit.

Who then would you say is a better customer for a credit card issuer?

You would think it is Janice, but in fact it is Rakesh who is an ideal customer from the point of view of a card issuer!

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No credit card company would ever admit this, but a card user like Rakesh is a cash cow for them for he is not a defaulter and pays a higher rate of interest on revolving balances.

Here are four mistakes your credit card issuer will be glad you if made.

Missed payments

Rakesh did not have the money to pay off his dues when his credit card statement reached him in the last week of February.

He paid when his salary arrived in the first week of March.

He thought he was being charged a late payment fee and 3 per cent interest.

What he ignored was that the monthly interest rates along with the late payments are mounting up to a high annual rate of interest of 36 per cent plus.

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Exceeding credit limits

You card issuer will urge you to increase your credit limit from time to time. Once you exceed your credit limit, your card issuer will charge you Rs 500 every time you use your crdit card or 2.5 per cent of the over-limit amount.

While your card issuer earns money, your credit score is negatively impacted.

A bad credit score can mar your possibility of getting all future loans.

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Your card is not really free

Credit card companies make a fortune wooing gullible spenders like Rakesh and offering them 'zero charge' credit cards.

Such cards may be free for the first year but there are annual renewal charges.

Other hidden charges such as 2.5 per cent fuel surcharge, processing fee for an EMI, a late payment charge or cash withdrawal charge are rarely explained to customers.

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Applying for more credit with poor credit

Rakesh thinks it's a style statement to carry two or three credit cards, but the card issuers are making merry at his expense.

Even if your credit history is poor, another credit card company may issue a second credit card to you.

However, you will not get the average rate of interest which is 13-15 per cent but will be charged more than 20 per cent, because of your poor credit record.

This is all the better for your new card issuer who now stands to earn more from you!

A credit card owner has seemingly simplified life as you can now get anything on credit, but making cardinal mistakes and untamed use of your credit card will lead you on to the path of a financial disaster.

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